Why the VIX May Challenge All-Time Lows

The S&P 500 Volatility Index (VIX) spiked to a low of $12.10 on Monday, which may have provided a clue that higher highs are in store. Although the index failed to hold the $12.50 level, the test to $12 was the lowest the VIX has traded all year.

I still want to see if it closes below $12.50 to $11.50 to confirm higher highs, and the VIX needs to hold $14 to $15 this month to make that happen. In trading this morning, the VIX rebounded 5.6%.

The suits-and-ties tend to ignore the VIX when it’s flatlining and usually only make comments when the index is pushing $20 or when it’s in the low teens. Last year, I predicted that the VIX would test single digits, and last July’s low checked in at $10.28.

My chart work is telling me that the S&P 500 could make a run at 2,200 to 2,300 over the next six to 12 months and, if it does, it is very likely that the VIX will be below $10. This will certainly have the talking heads clamoring and questioning what is wrong with the volatility index. As you can see from the 25-year chart below, the VIX has fallen below 10 on only a few occasions.

05052015-vix

If and when the VIX does test $10 to $9, I would then become cautious myself on a market pullback, correction or selloff. It is possible that the VIX could hold $10 for a few weeks, but it will have become a hot topic, if not the hottest story, by then, at which point it will be time to go.

With the major indexes setting all-time highs throughout 2014 and 2015, it’s hard to imagine the VIX not challenging all-time lows at some point this year.

Although I haven’t recommended options on the VIX lately, options do trade on the index. At some point I may elect to take a few bullish or bearish VIX trades. For now, I’m watching the May $15 calls and the May $13.50 puts for possible trades. I’m looking at the June options with the same strikes as well, as they would provide an extra month for a potential trade to play out.

However, I will likely sit out of those trades, as I want to see some continued follow-through in the market and certain stocks I’m watching before adding additional upside risk.

I often say that calling a market top is never easy, which is why so many knuckleheads have been wrong over the past few years as they try to do so.

The market has traded higher in May over the past two years, and there is still wiggle room or “fluff” to higher highs. I won’t get nervous or bearish until the bears saw a leg off of the bar stool, and there are plenty of clues that will let me know when a possible market top is in or when the action is getting wobbly. In the meantime, I will continue to play the three-month trading range.

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