I have lost count of how many people have pointed to the VIX as an indicator the market is in okay shape. There may have been a time where there was empirical evidence that the VIX was a leading indicator. As far as I can tell, it is now just a coincident indicator and is part of the risk on/risk off trade. If you look at stocks, oil, Eur, and VIX in the morning, all you need to do is look at one of those in the afternoon, and you can probably come pretty close to guessing where the other 3 markets are. That is all the evidence I need to decide that VIX is no longer a leading indicator. I have heard the smart money now looks at forward implied volatility or volatility skew as a better predictor of future market moves. Those sounds confusing enough to me that they may work, but the VIX, in my opinion has little predictive value, and if anything may be a good contrary indicator. It seems to me that VIX gets very low before big corrections, and VIX gets very high before big rallies.
Speaking of contrary indicators, even Alan Abelson took the time to point out that the American Association of Individual Investors had turned decidedly bearish, which is a contrary indicator. Again, maybe that has been the case, but for the past 6 months, investors seemed to time the market pretty well. They turned bullish and the market continued to trend higher. They became bearish and the market started to sell off. The timing has not been perfect, but it doesn’t completely support the assumption that is a contrary indicator. Once everyone knows about a contrary indicator, does it remain a contrary indicator? Maybe it is the fact that retail is now so irrelevant to the market, that their sentiment doesn’t matter? Or maybe it is because the internet has created a greater bias to the survey than it had in the past? In any case, it makes me nervous anyone who comments on this number is convinced it is a contrary indicator..."
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