Click to EnlargeAs stocks slumped, yesterday the CBOE Market Volatility Index (CBOE:VIX) “rallied” around 8% and finally moved above the 20 mark again, closing above this level. Note the trendline of lower highs and lower lows the VIX has been following in 2012 so far.
Well, yesterday, the VIX broke above it and with that may soon be able to make a higher high. How far can the VIX go? The 25 – 30 area seems reasonable if the price correction in stocks has further to go.
In S&P 500 Index (SPX) terms, we are only five days and 4.5% into a correction. The average correction lasts around three to four weeks and in terms of price, the 1335 – 1345 area looks as better support than 1360, which was yesterday’s support and right at the uptrend dating back to October 4.
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If 1340 or lower comes into play for the broad market, the VIX will surely be well above 20.
Given how little protection buying was going on up until recent days and the fact that at- the-money calls on the SPDR S&P 500 ETF (NYSE:SPY) are still more expensive than equivalent puts, it is very conceivable that volatility has further to rise.
While many stocks have started correcting in recent days, Apple (NASDAQ:AAPL) is still dangling high up on the tree. Given how large a part of the broader indices AAPL has become, if it starts correcting, volatility will then spike further as well.
Think of it this way; most people who bought AAPL are likely in the green with their position and as such, AAPL will be the first stock they sell on margin calls. This very similar to how gold was being sold on any margin calls in 2011.
Click to EnlargeAs investors sell their AAPL shares, it puts pressure on the big indices, which in turn will cause investors to buy more protection, thus pushing up volatility.
Also note that the 10-day Average True Range on the S&P 500 now stands at 16 and change and is rising. The daily swings are getting wider and spooking the dip-buyers, who ruled the land in 2012 up until last week.
Serge Berger is the head trader and investment strategist for The Steady Trader. As of this writing, he does not own any securities mentioned in this article. Sign up for his free weekly newsletter.