Which way to go?

VIX: an index of implied volatility based on the S&P500 index options and is calculated from both calls and puts.  Low values reflect complacency, higher values greater levels of fear.



Since May 4th, the TSX has had eight days with 200+points daily range.  Some have argued that increased volatility is consistent with market tops.  To see the validity of this argument I decided to reference the VIX against the market top in 2008.  The last peak of 15073 for the TSX before the series of lower highs and lower lows was on June 18, 2008.  On that date, the VIX was 22.24.  This overlay provides a reference of VIX levels and the TSX.

Clearly the VIX moves inversely with the market in principle.  However, the timing and the range of the moves are not uniform.  Most noticeable is the VIX peaked in October while the market did not bottom until March 9th.  There was a 1500 point further drop in the TSX between the VIX peak and the final market bottom of 7591.  1500 points is a lot of pain to take if you took a position because of the VIX.  What is very interesting about this most recent market drop is the scale of the VIX move versus the scale of the TSX move.   The VIX doubled while the market only dropped roughly 5%.   I think this is indicative of the tentative nature of this low volume melt up from the March lows.  The people that have ridden this market up have had one foot out the door the entire way and when the party looked like it was over, the herd ran for the door.  The volume on the selloff days demonstrated that people were ready and willing to bail out at the slightest provocation.  With the massacre in 2008 still fresh in the minds of investors, nobody is in the mood to weather another decline of that magnitude again.  Given the jittery mood of investors, does this mean a crash is imminent?  My personal opinion is no because it is precisely because of the jitteryness of investors that makes a crash unlikely at this point.  Which is not to say that further declines are not coming but bear markets are designed to catch the majority of people off-guard.  They tend not to come when people are expecting it.  And clearly with the volatility index showing the the latent fear in investors, people are not off-guard.  Rather, the scenario I see is a sideways consolidation with perhaps some increases up to, at the most, the recent highs before the real cascade comes.  Notice that during the topping process, the 50 day ma was level for almost 10 months.  Presently, the 50 day ma is still sloping up.  So we have some time to go still.

As for trading, the volatility will make it difficult for longer term and swing traders as being wrong will cost more.  I  plan on holding off on investing anything long term at the moment.  The upside is insufficient for the risk involved.