I think most of us have enjoyed this 4 month rally from the November 2012 low. But is it beginning to show signs of a pull back or are the market participants starting to show signs of nervousness that will pass in time?
In this market update I compare a chart of the S&P500 index compared to the Volatility Index (VIX) to see is we can glean some insight to the future direction.
We can see that there is an inverse correlation between the VIX and the S&P 500. As the S&P500 make small incremental moves up, the VIX slowly moves down. This shows that the market participants are comfortable with the uptrend.
There are times where the VIX starts to spike, points 1-3-5 on the chart. This shows that those currently invested in the market are starting to hedge their investments using insurance known as Options Contracts. This can be a precursor to a reversal of the short term trend. We are currently in a long term uptrend (4 years). We are also in a medium term uptrend (4 months). We may be starting to see a short term downtrend (3 days).
The VIX is still at a very low level. But if we see the VIX start to spike strongly this should give us a heads up that the market is getting nervous and we should expect some pull back to the current medium term trend.
I am currently LONG Stocks and Options on Value Stocks & Mining and am still in the market, but I will be keeping a close eye on the VIX and the primary price trend in the major indices. I am betting the market will continue up after a short pullback.
What do you think? Leave a comment below.