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No Fear in the Market?

Wow, small cap stocks just can't seem to get out of their own way, stretching the Russell 2000's losing streak to 6 straight days and potentially 6 straight weeks.

That type of selling pressure is rare. The market has not seen a six week decline in over nine years. Yet the VIX has yet to push above 20.

***One of the major questions I've received lately deals with the VIX and its lack of movement over the past several weeks. The most popular measure of "volatility and fear" in the market has not moved much during the recent six week correction, which is indeed odd during steady declines.

As a result, several subscribers have asked, can the market form an intermediate-term bottom without a significant spike in the VIX? Before, I get to the question at hand let me give you some background information on the VIX.

Earlier this week I introduced the VIX in, " What Volatility Means for your Stocks ."

The VIX can be viewed as the "investor fear gauge" index. It measures the volatility and fear in the market by tracking the implied volatility of at-the-money put and call options for a 30-day period in the S&P 500.

When stocks go down, option volatility (VIX) increases as more options traders buy puts to protect their stock portfolio, as an alternative to shorting, or to speculate.

This is exactly what has been happening over the last few weeks, but at an alarmingly slow rate.

The Chicago Board Options Exchange Market Volatility Index (VIX) has pushed higher as the market has become more fearful about the current state of the market.

The Chicago Board Options Exchange Market Volatility Index

In fact,since hitting a low of 14.6 percent at the end of May,
the VIX has spiked as high as 18.79 on Wednesday. A VIX below 20
means the market is complacent and investors are not concerned
about the current outlook of the market.

In fact,since hitting a low of 14.6 percent at the end of May, the VIX has spiked as high as 18.79 on Wednesday. A VIX below 20 means the market is complacent and investors are not concerned about the current outlook of the market.

When true fear enters the market we typically see a VIX above 30 percent. But, it hasn't happened during the six week decline.

Part of the reason is this - the decline in May came on extremely low volume. In fact, volume in May was the third lowest on record for the month.

Also, we are entering the summer doldrums, when volume in the market dries up causing volatility to remain subdued.

It is not out of the ordinary to see volume dry up when we enter the "Sell in May" period, but last month's low volume indicates that the selling occurred on very little conviction.

As of Tuesday the S&P had declined over 4 percent to a one-month low. What is puzzling is that the VIX declined as well during that same timeframe.

S&P chart from Sentimentrader.com

(Chart courtesy of Sentimentrader.com)

***Since 1986 there have been seven occurrences where the S&P 500 has moved to a one month low, losing at least 4 percent while the VIX experienced a simultaneous decline.

Jason Goepfert of SentimenTrader created a table that displays each occurrence.

TEXT

As you can see, one month after hitting a one month low the
market was actually higher 88 percent of the time - with an average
gain of 6.1 percent. The average loss was only -2.2 percent.

As you can see, one month after hitting a one month low the market was actually higher 88 percent of the time - with an average gain of 6.1 percent. The average loss was only -2.2 percent.

So it seems to me that the lack of a spike in the VIX over the past six weeks is actually quite bullish for the market going forward.

I would expect to see a move to test what has been strong resistance at 1250 on the S&P. A push to this level should be followed by a nice bounce in the S&P and therefore the small cap indices, including the Russell 2000 and S&P 600 Small Cap Index.

Remember, even with the six week decline, the market is still trading in a range-bound fashion.

***Tyler urged me to let all readers know that his most recent Special Report: How to Safely Make a Fortune on a 'Must Have' Energy Technology, is now available on the Small Cap Investor PRO website.

While the broad market is falling week after week, Tyler's two recommendations in this report are UP 8 percent and 10 percent over the past three weeks. No smoke and mirrors marketing here, just two energy stocks that are bucking the trend and making investors money.

You can sign up for a free trial subscription, and get this report, here .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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