Greed and fear run world stock markets, so watching fear is a good way to get a feeling for the future direction of stock prices. When the VIX (NYSE:VXX), the CBOE “fear indicator,” declines stock prices are expected to rally, and when the VIX rises, stock prices are likely to decline.
A quick look at a couple of charts gives us a good indication of what the VIX says about markets today. What we’re now seeing in the VIX is a mix of short- and long-term signals.
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Chart courtesy of www.stockcharts.com
In the daily chart of the VIX at right, we can see that it has been in a sustained downtrend since October 2011, which corresponds to the recent rise in stock prices. However, in recent days, we have seen VIX put in a bottom and now has been pressing to break through the upper band of its 20-day moving average.
A break to the upside here would indicate higher VIX/lower stock prices ahead, while failure to break near-term resistance would likely lead to a lower VIX/higher stock price scenario.
The weekly chart of the VIX gives a longer-term view, and here the trend is clearly down, which would indicate that stock and ETF prices should be rising which, of course, they have been doing.
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Chart courtesy of www.stockcharts.com
Short-term VIX action points to sideways consolidation or a short correction in stock prices, while longer-term indicators indicate declining fear and rising stock prices will be the most probable scenario going forward.
At Wall Street Sector Selector, we closed a short VIX position on Tuesday, Jan. 17, for a realized gain of 23.6% (excluding commissions, taxes and expenses) on a position opened Dec. 15, 2011. We now wait for a clear directional signal from this fear indicator and then plan to reenter the market to travel in whatever direction greed and fear might take us.
