The Option Pit Traffic Light for VIX is Yellow

The Option Pit VIX traffic light has teetered on changing colors a couple of times over the last two weeks.

The move on Monday was enough to trip it to yellow.

Two main pieces of the indicator moved it.

First the VIX went partially “backward.”

No Im not talking about Marty McFly and back to the future here folks…

This means the cash VIX(the dotted green line) is now trading at a premium to the front month future(the yellow line) as you can see below:

In addition,  Feb is trading above March and March is trading at a premium to April and so on.

Only January is trading at a discount to the next month out.

Normally this kind of formation is enough to turn my indicator yellow,  not quite green.

For it to be green I would need the Cash above Jan like it is now AND…

 The first yellow dot to be above the next yellow dot.

As you can see, its clearly not doing that with the Quasimodo hump we got going on.

Another piece of my indicator that I have touched on in a few previous blogs is VIX correlation.

VIX is moving strongly on down S&P days, and is firm on rallies.  

Below the top chart is SPX and the bottom chart is VIX since Thanksgiving:

As you can see both had been trending up leading into Monday’s sell off.

Other indicators in my system are also flashing yellow.

The point is,  we might get a pop in the S&P500 tomorrow,  but the firm VIX might be here for a bit longer than even the Georgia runoff.

We have had a period of extremely low volatility in the S&P 500.  

Leading into Monday 20 day trailing Historical Volatility (how much the market is actually moving) was less than 9:

That does NOT warrant a 20 VIX.

So something has to give,  either Monday was the beginning of a new trend toward increasing market movement or the VIX is going to back off fast.

I’m expecting the former but have not made a move yet on it.

Your Only Option,

Mark


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