Courtesy of Tactical Beta

Introduction

The $VIX closed at a 52 week low this week, and complacency reigns!

Figures 1 through 4 are weekly charts of the SP500 with the $VIX data hidden. The red dots on the price bars are those times the $VIX closed at a 52 week low. Figure 1 covers the period from 2009 to the present. Figure 2 covers 2003 to 2008. Figure 3 is from 1995 to 2001, and figure 4 is from 1991 to 1995.

Figure 1. SP500/ weekly

Figure 2. SP500/ weekly

Figure 3. SP500/ weekly

Figure 4. SP500/ weekly

When the $VIX makes a new 52 week closing low it certainly has marked significant market events both good and bad. The bad market events (i.e., heralded by lower prices) include July, 1998, the 2000 market top, the final slide into the 2003 bottom, the 2008 market top, and the 2011 market melt down. These signals are noted by the yellow highlights on the above charts. Here the $VIX worked as we expect it to work; investors become complacent, and it is within this dynamic that markets reverse course.

Yet, there are times that the $VIX signals — a new 52 week closing low — don't work like we expect. These are considered failed signals. See the signals inside the green ovals on the above charts. These failed signals occurred in 1991 coming out of the recession, in 1995 after a prolong period of stagnant market action, in 2003 coming out of the recession, in 2009 coming out of the recession, and in 2013 following the announcement of QE to infinity. I have always contended that failed signals carry as much weight as the real signals because we should take notice when the markets do not do what we expect them to do.

So this brings us to our current signal, and the big question remains: will the current signal be a sign of complacency, which suggests that lower prices are ahead or will the current signal be a failed signal leading to significant market gains? Increasing valuations, stagnant economic data and the length of time that this bull run has gone on all speak to a market top. Market tops occur when investors are complacent with the $VIX making multi-year lows. On the other hand, failed $VIX signals tend to coincide with accelerating economic activity, the kind that is seen following economic downturns. Of course, the most recent failed signal in 2013 was the result of extraordinary monetary accommodation courtesy of the Federal Reserve. If the current $VIX signal is going to be a failed signal, then this time will need to be different as economic growth remains stagnant and is unlikely to accelerate and the Fed seems more willing to disengage then re-engage with the markets.

From this perspective, the current signal is more consistent with a market top, but we won't know until we know. Right now our key technical level is SP500 1848.29. A close below this level will most likely represent a market top.

While everyone wants to know which way the market will go, the reality is no one knows. No one. The best I can tell you is that the $VIX has closed at a 52 week low, and this is a signal that something significant usually followed. I believe it will be more consistent with a market top, and a close below SP500 1848.19 will confirm my belief.

Dumb Money/ Smart Money

The “Dumb Money” indicator (see figure 5) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. The indicator shows that investors are NEUTRAL.

Figure 5. The "Dumb Money"

Figure 6 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Market-wide sentiment continues to be in positive territory as the divergence seen in the market is apparent amongst insiders as well, with the buy bias in the Russell 2000 strengthening and sentiment within the S&P 500 moderating and showing more negative attributes. We continue to see buying at beaten down small-cap Technology and Healthcare companies; multi-insider buying events at companies hit hard by earnings/guidance announcements; a renewed buying interest by Banking insiders; and, a slowdown in 10b5-1 trigger-price Unusual Events versus recent quarters. The Consumer Staples and Financial sectors are showing the strongest sentiment, followed by Healthcare and Consumer Discretionary. The Utilities sector is showing the weakest sentiment."

Figure 6. InsiderScore “Entire Market” value/ weekly

$VIX

Figure 7 is a weekly chart of the SP500 with the $VIX data in the lower panel. The black dots on the $VIX data are key pivot points, which are areas of support and resistance. The $VIX has closed at 11.36, and this is a multi-year low. Resistance is at a $VIX level of 12.22.

Figure 7. $VIX/ weekly

TacticalBeta is positively, absolutely 100% FREE. You get actionable and timely market research covering the major asset classes, and it is all FREE. We are Duty Free, Tax Free, Smoke Free, Risk Free, Sugar Free and Gluten Free. We even offer Free Delivery. There is no Free Trial. It's the Land of the Free. 100% FREE means 100% FREE.  SIGN UP NOW