VIX Warns of Imminent Market Correction
The comments below are an edited and abridged synopsis of an article by Chris Vermeulen
The VIX is warning that a market peak may be setting up in the global markets, and that investors should be cautious of extremely low prices. These are typically followed by some type of increased volatility.
The Federal Reserve continues to push an easy money policy and has recently begun acquiring more depth, allowing a deeper move towards a QE stance. This move, along with investor confidence in the US markets, has prompted early warning signs that the market has reached near extreme levels.
When the VIX falls to levels below 12 to 13, this typically very low level is usually associated with an extreme peak in price. Throughout history, after the VIX has collapsed to these types of low price levels, the markets have a tendency to correct in ranges that are typically in excess of 3.5% to 5.5%. In some cases, these corrections have been as large as 11% to 18% or more.
Vermeulen discusses the current continuous VIX price chart and the custom market cap index, and gives his concluding thoughts: “As we near the end of 2019, the current bullish price trend may come to a dramatic end as the VIX charts and our custom Index charts suggest the US/global markets may have reached levels that support [the view that] a price rotation/reversion event may be setting up. Traders need to be prepared for the risks associated with such an event and plan for extended risks.”