Sometimes it takes a different look at an old and stale indicator to squeeze out some additional insight. A look at a price adjusted VIX (compared to the ‘good old VIX’) may do just that.
Here’s how the VIX has become old, stale, and almost useless:
On March 14, 2013 the VIX dipped as low as 11.05 (the lowest level since 2007) without any negative effect on stocks. For much of 2013 the VIX (Chicago Options: ^VIX) was stale and lethargic, spending much of the year below 13.5.
As such, it was stripped of its ‘stock market top sniffing’ abilities and became worthless like a drug detecting dog with a burned out snout.
For much of 2013 the VIX traded at the same level as in 2007. But in 2007 the S&P 500 hovered around 1,500 compared to 1,800 in 2013.
If the S&P is 20% higher, shouldn’t the VIX be 20% lower?
The VIX, as we know it, does not adjust for the price of the S&P 500 (SNP: ^GSPC). It does not have to, because it projects the expected percentage movement of the S&P 500.
Nevertheless, the three charts below plot the S&P 500 against a price adjusted VIX (PA VIX) at different time frames.
The price adjusted VIX is simply calculated by dividing the VIX against the S&P 500 (VIX/S&P 500).
The first chart provides a big picture look at the difference between the VIX and PA VIX in correlation with the S&P 500.
The differences are subtle, but noteworthy:
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Since 2013 the VIX has been in a net sideways range, while the PA VIX has been in a slight down trend.
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The PA VIX is near all-time lows, while the VIX is above its 2007 lows.
The second chart highlights the 2006 – 2014 timeframe.
The third chart zooms in on the very recent PA price history.
The PA VIX is not a miraculous new indicator, but it shows that – when taking the S&P 500’s price into consideration – the VIX is very near an all-time low.
As a contrarian indicator, the VIX has turned into a broken clock that – after many wrong signals - will be right eventually. The PA VIX is telling us that now isn’t the time to be complacent.
The April 2 Profit Radar Report warned of complacency when it stated that: "There's a bullish technical S&P 500 breakout, but a number of indicators suggest this will end up being a false breakout."
In fact, there is a very simple ‘indicator,’ which predicted the last several false breakouts and S&P 500 pullbacks.
A visual of this indicator is available here (make sure to take a look at the date!):
S&P 500 – Stuck Between Triple Top and Triple Bottom
Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.
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