No Fear in the Market?
Wow, small cap stocks just can't seem to get out
of their own way, stretching the Russell 2000's losing streak to 6
straight days and potentially 6 straight weeks.
That type of selling pressure is rare. The market
has not seen a six week decline in over nine years. Yet the VIX has yet
to push above 20.
***One of the major questions I've received lately
deals with the VIX and its lack of movement over the past several weeks.
The most popular measure of "volatility and fear" in the market has not
moved much during the recent six week correction, which is indeed odd
during steady declines.
As a result, several subscribers have asked, can
the market form an intermediate-term bottom without a significant spike
in the VIX? Before, I get to the question at hand let me give you some
background information on the VIX.
Earlier this week I introduced the VIX in,
"What
Volatility Means for your Stocks."
The VIX can be viewed as the "investor fear gauge"
index. It measures the volatility and fear in the market by tracking the
implied volatility of at-the-money put and call options for a 30-day
period in the S&P 500.
When stocks go down, option volatility (VIX)
increases as more options traders buy puts to protect their stock
portfolio, as an alternative to shorting, or to speculate.
This is exactly what has been happening over the last few weeks, but at an alarmingly slow rate.
The Chicago Board Options Exchange Market
Volatility Index (VIX) has pushed higher as the market has become more
fearful about the current state of the market.
In fact, since hitting a
low of 14.6 percent at the end of May, the VIX has spiked as high as
18.79 on Wednesday. A VIX below 20 means the market is complacent and
investors are not concerned about the current outlook of the
market.
When true fear enters the
market we typically see a VIX above 30 percent. But, it hasn't happened
during the six week decline.
Part of the reason is this
- the decline in May came on extremely low volume. In fact, volume in May
was the third lowest on record for the month.
Also, we are entering the
summer doldrums, when volume in the market dries up causing volatility to
remain subdued.
It is not out of the ordinary to see volume dry up when we enter the "Sell in May" period, but last month's low volume indicates that the selling occurred on very little conviction.
As of Tuesday the S&P
had declined over 4 percent to a one-month low. What is puzzling is that
the VIX declined as well during that same timeframe.
(Chart courtesy of
Sentimentrader.com)
***Since 1986 there have
been seven occurrences where the S&P 500 has moved to a one month
low, losing at least 4 percent while the VIX experienced a simultaneous
decline.
Jason Goepfert of
SentimenTrader created a table that displays each
occurrence.
As you can see, one month
after hitting a one month low the market was actually higher 88 percent
of the time - with an average gain of 6.1 percent. The average loss was
only -2.2 percent.
So it seems to me that the
lack of a spike in the VIX over the past six weeks is actually quite
bullish for the market going forward.
I would expect to see a
move to test what has been strong resistance at 1250 on the S&P. A
push to this level should be followed by a nice bounce in the S&P and
therefore the small cap indices, including the Russell 2000 and S&P
600 Small Cap Index.
Remember, even with the six
week decline, the market is still trading in a range-bound
fashion.
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