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As the bulls and bears thrash it out at the knife edge of technical support, otherwise known as the 750 line on the S&P 500 index, the CBOE volatility index (VIX) is surprisingly calm:
As more and more days go by with the market dancing on the thin line marked by the November 2008 lows and the VIX staying much lower, the divergence gets more and more attention. In fact, the VIX has not even been able to muster a challenge to its January highs of 57. Like most indicators, this divergence can be interpreted several ways, depending on your existing bias.
If you happen to already have bullish tendencies, then you’ll probably interpret this circumstance to mean that the market is healthy since this is the classic ‘bullish divergence’ in technical analysis. Also, back in October 2008 when the VIX first hit 80 (and beyond) that didn’t mark a definitive bottom - so why should be expect a high VIX reading at those levels again to have similar significance?
If you happen to be a bear, then you’re probably thinking that the VIX must, at some point, be forced to revisit the highs it reached back in November 2008 before the market can truly find a lasting low. After all, if the VIX is so low (relatively speaking) that must mean that the options market is complacent. And no real bear market can be killed by complacency.
Personally, I’m not sure what to think. We are in a very strange market and it is fascinating to watch. But beyond that, if pressed I would slightly shuffle over to the bullish camp.
The CBOE volatility index is calculated based on the options market - which has been absolutely bonkers. By that I mean that it hasn’t followed the usual historical patterns. Over the past few months, I’ve struggled to make sense of it but I keep returning to just shrugging my shoulders and thinking that the options market has gone crazy.
What do you think is really going on? what does the VIX divergence mean? and the eccentricity of the options market?
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