Volatility, Greed And Fear: What They're Telling Us
Nicholas Santiago | Jul 22, 2013 05:03PM ET
The Volatility Index is currently trading at 12.52, -0.02 (-0.16%) while the Greed and Fear Index is showing greed. These are two indicators that I use on a regular basis to give me a market bias.
Volatility
The Volatility Index measures fear. When it's low compared to historic norms, sharp selling is not far behind. When the VIX spikes dramatically higher and trades in the high ranges compared to history, the markets are usually setting up to rally. The VIX trading at $12.52 -- considered to be in the lower range -- tells me to be defensive in the short term, even though the average investor and media heads are extremely bullish.
State Of Greed
The Greed and Fear Index measures almost the same thing as the Volatility Index. Combined, these two can give a clear picture of where the markets are headed. The Greed and Fear Index takes into account multiple factors to arrive at its final verdict. As of Monday, the Index tells us the markets are in a state of greed. Note the snapshot below.
The key here is to recognize these indicators for what they are -- a measure of sentiment in a market that is almost always contrary. In other words, when everyone is bullish, the markets will reverse and go down and when everyone is bearish, the markets reverse and move higher.
Last Time This Happened...
The markets are floating higher and gaining more and more bulls. Greed is nearing the extreme levels. Last time this happened was when the May top was hit. Once hit, the markets tumbled 7% in weeks.
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