Wednesday, December 16, 2009

Historical Volatility Pointing to a Sub-20 VIX

Just as I get in an extended discussion of historical volatility (HV), I note that the combination of 10/20/30/50/100 day HV has plummeted to levels not seen since mid-October 2007, which happens to be one week after the all-time high in the S&P 500 index.

It is worth noting that back in mid-October 2007 when the similar HV numbers were posted, the VIX was hovering around the 18.00 level.

With the VIX Holiday Crush starting to kick in and the drama associated with today’s FOMC meeting now behind us, I now believe there is about a 50% chance that the VIX dips below 20 in the next two days, even with the E-mini S&P 500 futures (/ES) down 4.50 as I type this. The alternative, which has been the status quo as of late, is that the 20 area acts as support for the VIX and triggers resistance in stocks.

Now the VIX does not have to follow historical volatility religiously, but if HV continues to fall, the case for a 20+ VIX will deteriorate rapidly. Substantial divergences tend to have a relatively short life. With the current divergence now at six trading days, the VIX can only defy gravity for a short while longer…

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