Bernie Schaeffer’s “Monday Morning Outlook” is generally an excellent perspective for any trader to contemplate going into the trading week. This week’s commentary is one of the better ones, as Schaeffer looks at a variety of data points to consider whether or not the markets may be putting in a bottom.
One of the themes that Schaeffer takes up is a sense of concern starting to overtake the recent investor complacency. Schaeffer cites the VIX as an example of continuing complacency in his remarks and in so doing goes on to make a potentially more interesting claim that he and his colleagues believe the VIX action represents the maneuverings of the smart money:
“One dissenter to this growing crack in the complacent armor was the VIX, which was little changed even while the market moved defiantly into losing territory. In fact, the supposed ‘fear barometer’ has shown little signs of alarm for a few weeks now, preferring instead to shuffle sideways. It has yet to make a significant move above the 30 level or come within sniffing distance of its mid-August peak.
However, the VIX action presents some very interesting possibilities. Its continued inability to move below the 32-week trendline is bearish, as we've pointed out before. But I wonder whether the fact that the November spike has fallen short of the August spike might actually be bullish in its implications, in the sense of a ‘non-confirmation’ of the pullback, rather than the conventional view that this is a bearish indicator of complacency. This interpretation would only make sense if you felt the VIX represented smart money, an evolving conclusion that we at Schaeffer's have reached over the course of this year [emphasis added]. Note that you could consider the VIX spike in the first quarter to be a non-confirmation relative to the spike in the second quarter of 2006, as it fell shy of the 2006 peak. The spike to higher VIX highs in August then ‘confirms’ the bearish trend, and by that reasoning (assuming the VIX has, in fact, peaked) the current spike is another non-confirmation with bullish implications.”
Setting aside the caution-complacency issue for the moment, I find it interesting that Schaeffer believes the VIX is the footprints of the smart money. I am slowly coming to the same conclusion myself and will attempt to address this issue a little more scientifically in this space in the future.