What is VIX saying about today's market?

Market sentiment can be measured in many ways. These include Investor's Intelligence surveys, the Daily Sentiment Index (DSI), as well as readily-available VIX and Put/Call ratio indicators.
Baseline Analytics TrendFlex uses VIX and Put/Call ratios as an indicator to assess the risk of the current trend changing.

For example, see the chart below. The S&P500 is plotted on the main chart with VIX (pink line) behind it, and the Put/Call ratio below. Each indicator is compared to its 34-day exponential moving average. 

You will note the ovals drawn at various points on the VIX chart as well as circles drawn on the Put/Call ratio chart. These indicate extreme points vs. the indicator's 34-day exponential moving average. VIX and Put/Call indicators and their "gap" from the moving average are treated as contrary indicators. In calculating part of its TrendFlex Score, Baseline Analytics treats an extreme high in VIX or Put/Call, considered "extreme fear," as a contrary indicator. This signals a potential bullish trend change. Note the extreme points marked at the start of June 2012. That point effectively signaled a shift in the S&P500 from a downtrend to an uptrend.

Today, VIX remains over 20% below its 50-day exponential moving average and 18% below its 34-day moving average. See the chart below:



Please note that Friday was options expiration day, so that may have skewed the final price. But in the past, such extremes versus these moving averages have been useful technical indicators to suggest caution with the current trend. With VIX being low and suggesting complacency, investors are encouraged to protect long positions with stops, hedge with options or index shorts, and not to wholeheartedly embrace the uptrend by adding aggressively to long positions, afraid to miss the rally.

Although this signal is not 100% effective on its own, traders and investors are encouraged to use this tool alongside other technical indicators to assess the risk of change in the current trend.  Click here to learn more about Baseline Analytics TrendFlex indicators and our TrendFlex Score designed to measure the risk of a trend change.

Dow Theory Affirms Market Uptrend

This past October, the Dow reached a new high but the Transportation index lagged, as seen on the chart below.  This raised suspicions that the uptrend in the Dow (and S&P 500 for that matter), was on soft footing.  Dow Theory looks for consistency in technical patterns between the Dow and the Transportation Index.

When the indices diverge, for example, a vote of non-confidence is given to the Dow trend. When they agree, especially as they stair-step higher, a vote of confidence in the uptrend is affirmed.

In December, the Transportation Index broke out of a consolidating pattern and has head toward a new high. The Dow reached a high in September/October as the chart below shows, and is beginning to challenge that high in January.

For a primary trend buy or sell signal to be valid, both the Industrial Average and the Transportation Index must confirm each other. If one average records a new high or new low, then the other must soon follow for a Dow Theory signal to be considered valid.  See below a depiction of Dow Theory signals from StockCharts.com.

There are some criticism of Dow Theory, such as the fact that the Transportation Index and the Dow Industrials today are comprised of quite different components than the original industrials and railroad stocks. Dow Theory, however, should be used as a part of the market technician's toolkit.

At Baseline Analytics TrendFlex, several indicators like this are scored to determine the risk to the current trend.  Learn more about our indicators and subscribe to our weekly signal updates at Baseline Analytics.

- Baseline Analytics