VIX Suggests Increase In Volatility
Guy S. Ortmann, CMT | Jul 26, 2016 09:09AM ET
Opinion: All of the indexes closed lower yesterday with negative internals on the NYSE while NASDAQ internals were mixed. Volumes increased with the declines on both exchanges. While declines were modest, the VIX and DJT added some weight to our near term concerns as discussed below. The data remains a mix of neutral and negative readings. As such, we find no reason to alter our current near term “neutral/negative” outlook for the major indexes given the magnitude of the recent gains combined with uptrend violations and valuation.
On the charts, all of the indexes closed lower yesterday with negative internals on the NYSE and mixed internals on the NASDAQ. Volumes increased on the session, implying a minor increase in selling pressure. No major technical signals were generated. However, we would note the DJT (page 3) flashed a “bearish stochastic crossover” signal implying further expected weakness for that index. Whether the other indexes will follow suit has yet to be seen. As such, the DJT adds a little more concern to the technical picture post the short term uptrend violations of last week.
The chart of the VIX (page 9) may be of greater import. As can be seen, the VIX traded below 12.00 last week. Over the past 2 years, any time the VIX has reached that level, the markets have subsequently experienced an increase in volatility and downward pricing pressure to varying degrees. The fairly high probability that some increased volatility may lie just ahead adds to our near term “neutral/negative” view.
The data remains a mix of neutral and negative readings with all of the 1 day McClellan OB/OS Oscillators neutral and all of the 21 day levels overbought (All exchange:+70.72 NYSE:+88.14 NASDAQ:+57.24). The OEX Put/Call Ratio (smart money) finds the pros adding to their put positions at a very bearish 1.97 while the Rydex Ratio (contrary indicator) at 58.5 finds the crowd increasing their already heavily leveraged long exposure. So the data continues to yield a somewhat cautionary tone.
In conclusion, the recent extensive rally for the indexes appears to be vulnerable to some near term weakness given the trend line violations of last week combined with the VIX, DJT bearish crossover and extended valuation. Thus we remain near term “neutral/negative” in our market expectations.
Forward 12 month earnings estimates for the SPX from IBES of $126.29 leave a 5.82% forward earnings yield on a 17.2 forward multiple.
SPX: 2,119/NA
DJI: 18,026/NA
COMPQX; 4,971/5,104
DJT: 7,696/8,017
MID: 1,518/1,553
RUT: 1,177/1,215
VALUA: 4,753/4,895
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