VIX Confirms Strength In S&P 100

07/18/05 01:44:16 PM

by Arthur Hill

Stocks continue to march higher as volatility continues to move lower.

Security: $VIX
Position: Hold

The CBOE Volatility Index (VIX) measures the implied volatility for a basket of S&P 100 puts and calls. Volatility increases when perceived risk increases, and volatility decreases when perceived risk decreases.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The VIX has been trending lower for about three years. In contrast, the S&P 100 has been trending higher since October 2002. There is clearly a well-established inverse relationship. As long as the VIX trends lower and within the falling price channel, we should expect the S&P 100 to trend higher and hold the trendline extending up from August 2004.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

There is a school of thought that considers a low VIX as a sign of complacency. This was the case with each low (gray arrows). There were calls for complacency the first time VIX moved below 20. Investors became more and more complacent as VIX moved even lower, but the S&P 100 just kept on moving higher. Perhaps a low VIX simply reflects less volatility. That may sound obvious, but low volatility means less perceived risk and a better environment for stocks.

Until the VIX breaks the upper trendline of the falling price channel and exceeds the April 2005 high of 18, volatility and risk are moving lower. Even though the pace may slow, this means that stocks should continue to move higher.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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