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VIX Points to a Pause, Not a Correction

Docile volatility indicator could be telling us that a minor pullback is likely


A pause in the advance of small- and mid-cap stocks continued Tuesday. And the impact of the lesser-quality stocks has resulted in lower prices for the S&P 500 and even the Dow 30.

Trading was light, but the major indices headed lower early in the session following a decline in the price of copper. The metal is a gauge of how global industry is doing and is considered a barometer of the future health of industry.

Worries over a possible conflict in Ukraine appear to be holding back some investors, and profit-taking following a run of 4.3% in February by the S&P 500 also contributed to Tuesday’s losses.

At the close, the Dow Jones Industrial Average was off 67 points at 16,351, the S&P 500 fell 10 points to 1,868, and the Nasdaq dropped 27 points to 4,307. The NYSE’s primary market traded 642 million shares with total volume of 3.4 billion shares. The Nasdaq crossed 2.5 billion shares. Decliners outpaced advancers on the Big Board by 2.1-to-1 and on the Nasdaq by 2.7-to-1.

SPX Chart
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Chart Key

This chart shows the relatively orderly nature of the intermediate trend through the last year. There have been several “adjustments” of about 5% but no real “correction” of 10% or more. Note that following each new high a period of consolidation takes place before the next leg of the advance begins.

VIX Chart
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Throughout February, the CBOE Volatility Index (VIX), a contrarian indicator, has been docile. This typically occurs following a market high and could be telling us that a minor pullback is likely.

The last time that the VIX was this quiet was in late December/early January, at the very low level of 12 to 13. That preceded one of the worst Januarys in recent memory. It is quiet again, but at the higher level of 14 to 15, it may be telling us that rather than a correction, we are most likely going to have a pause or perhaps a slight pullback to the S&P 500’s 50-day moving average, now at 1,828, before the advance resumes.

Conclusion: The current pause in the market’s advance is perfectly normal, and strong indicators support higher prices. Upside volume has been higher than downside volume, group rotation has been excellent, with technology stocks leading in February, followed by transports, then homebuilders, and most recently, the financials.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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