Stocks

The VIX Is Spiking --- and It Might Not Be Done Rising

The Cboe Volatility Index, or VIX as it is more commonly known, has begun a potentially explosive advance—and could surge dramatically. Usually, falling stock prices accompany a rising VIX

The Cboe Volatility Index, or VIX as it is more commonly known, has begun a potentially explosive advance—and could surge dramatically. Usually, falling stock prices accompany a rising VIX

The markets so-called fear gauge could be ready to surge higher—and that would be bad news for an already reeling stock market.

The Cboe Volatility Index, or VIX as it is more commonly known, has begun a potentially explosive advance. If my analysis is correct and the VIX surges dramatically, then it would project a dramatic increase in volatility. And usually we have seen that a sharply rising VIX has accompanied declining stock prices.

In my report to clients in March, I wrote that the VIX generated a long-term Buy signal at 14.75. So far the VIX reached 23 in May and 24.75 in August, before declining below 13.50 last month. So what is it about the VIX Index that says it is heading higher now?

The weekly closing chart illustrates a gigantic 8-year base. Every time the VIX reached the upper-20’s, it declined back to the bottom in the 10 area. But something began to change last year. I call it a “change in vital signs.” After closing at 29 in February, the VIX did not decline back to the bottom of the base. Instead it spent 5 months trading below its long-term 200-week moving average.

From there it surged to 30. Once again it retreated, but spent only 10 weeks below the 200-week moving average. After a brief rally, the VIX spent just 3 weeks below the 200-wk moving average. Finally, the most bullish development was the August rise, which saw the VIX gain 65% in just 4 weeks, followed by a mere single week below the 200-week moving average.

So we have successively quicker and weaker declines, producing rising bottoms. With this week’s 25% advance, the VIX projects a test of major resistance in the upper-20’s before year-end.

As the huge eight-year base continues to enlarge, it is only a matter of time before the VIX begins its liftoff from that base. Perhaps developments in Washington will dictate how quickly the VIX begins a new secular bull market. Once the VIX has a weekly close above 32, then my work would confirm upside projections to 50-55.

The Dow Jones Industrial Average has already dropped 2.8% this week. A higher VIX would almost certainly mean those losses get worse.

Andrew Addison is the author of THE INSTITUTIONAL VIEW, a research service that focuses on technical analysis.

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