The Volatility Index Hit a Three-Year Low — Important or Not? By, D. R. Barton, Jr.

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A quick note to the VTI faithful: Yesterday, just before I joined RJ Hixson and a truly international group for the first session of the “How to Develop Winning Trading Systems” course, the CBOE Volatility Index (VIX) hit a new post-pandemic low and closed below 14 since the first quarter of 2020.

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Three years is a really long run for high VIX. And for an index widely known as the “Fear Index”, it’s pretty easy to see why a drop to new lows has raised some eyebrows, and driven some analysts to say that the low VIX is another reason to doubt the current rally from October lows.

Before we consider what the lower VIX might point to, let’s look at a simplified explanation of the concept. VIX measures how much premium (cost) is being paid for S&P 500 options. If options buyers and sellers think the market will be jumpy (volatile), then they bid up the price of options. Some call this a fear premium. On the other hand, if options buyers and sellers foresee smoother markets, then the price paid for options drops and complacency rules the day.

Given this simple understanding, the following chart from Ryan Detrick is highlighted on a log scale to show how much time $VIX has gone low (yellow) and higher (red):

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In general, VIX can remain low for an extended period, and a VIX bounce even lower is not a very useful indicator of a market reversal. Here, it’s easy to notice that we have seen consistently low VIX for extended periods of time and a consistently low VIX is even a defining characteristic of bull markets.

Lower VIX is Consistent With Market Break

Two weeks ago, we looked at this chart to see the six-week range that would give way to a potential next move (higher or lower). I showed the chart as one of the most-cited reasons for the belief that the debt ceiling will be sorted out—that the S&P 500 and the Nasdaq stock indexes have stayed in near the top of their May ranges:

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Now, the VIX has closed yesterday at the previously mentioned three-year low while the market has held the intermediate support zone and broken above the short-term and long-term resistance levels:

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Of course, there’s still the concern for this being a weak seasonal period (Sell in May and Go Away) that, along with other factors, could turn this breakout into a “bull trap”. But the VIX drop is adding to the indicators showing a more impressive foundation for unexpectedly consistent market strength.

I’d love to hear what tools and tactics you use to help you make good decisions in difficult markets. Let me know! Relay them to me and any other thoughts or comments you have. Send them to me using drbarton “at”

Great Trading and God bless you,

D.R. Barton, Jr.

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