It’s interesting that during all of this, while the VIX has elevated, it has not hit the “panic” levels with prior Cyclical and Secular Bears. This is a graph I put together this morning to make the point. I’ve marked a few of the bears with read ovals and you can easily see the significant spikes in the VIX. We are not spiking the same with this dip.
Wall Street Journal just had an article about Buy the Dip Believers Testing the Market. I couldn’t get a link that would open it for non-subscribers, sorry. But the point is that there has been a marked increase in accounts since Covid hit. 10 million in 2020 and 10 million more just during the first six months of 2021 (not sure what the total is for 2021). These folks are jumping back in and it’s influencing the dips, as well as signals such as VIX.
Another way to look at it, the CBOE’s Put Call Ratio (CPCE) is also an indicator of sentiment and extreme swings correspond to potential reversals. Below is a graph of the CPCE, but as a 253 day moving average (253 trading days in a year). You can see some peaks with bear markets. But it is very interesting that following the Covid Cyclical Bear, there was a marked change in the CPCE with a resetting of the average to much lower levels (signifying a positive attitude with lots more Calls than Puts). We are just now showing some significant increase (hoping for the bottom reversal).
My point is that there seems to have been a significant change in some signals, possibly due to the influx of investors, with a different perspective/approach. Do we need to rethink our signals and how we interpret them? I don’t know. I’m posting this for interest and discussion. Apologies if this is too OT for this board, wasn’t sure the best spot.
Lakedog
Personally, think there is more drop based upon channels, but would be more than happy to see a reversal
Excellent point about the concern over shorts, lintiness.
I’ve struggled with CBOE’s website to get specific historical numbers, but total option orders are markedly elevated, the general number of puts seems to the same or slightly up, with the majority of the increase in calls. At least from my read, but as I’ve admitted, I am not comfortable that I am extracting the data correctly.
Regardless, it still makes the point that things have changed and Interpreting the numbers may need to be modified. A ratio of 0.6 may mean capitulation now, rather than looking for 0.8.
Along with VIX, watch Financial Stress. This number rises during a liquidity freeze (when market participants are so frightened that they will not buy or sell securities except at very high interest rates).
A rise in VIX above 50 along with a rise in the Financial Stress index above 2.5 is a sure sign of a financial crisis. This happened on March 20, 2020 when Covid-19 was running out of control in New York City and Hurricane Covid hit full force. That’s when the Federal Reserve stepped in with many emergency monetary stimulus measures. Their necessary emergency actions in 2020, carried too far into 2021 and 2022, led to the current bubble in stocks and bonds.
Currently, Financial Stress is very low. There is still plenty of money sloshing around the system and it’s still easy to borrow. As the Fed gradually tightens, expect Financial Stress to rise. They are trying to achieve a “neutral” rate which will not cause a recession.
If VIX and Financial Stress suddenly spike together, it’s a sure sign of that the bubble is popping and the market is in a panic. We are nowhere near that at this point.
It’s interesting that during all of this, while the VIX has elevated, it has not hit the “panic” levels with prior Cyclical and Secular Bears. This is a graph I put together this morning to make the point. I’ve marked a few of the bears with read ovals and you can easily see the significant spikes in the VIX. We are not spiking the same with this dip.
I’ve noticed this, too. Also Put/Call ratio. That is why it hasn’t looked like real panic to me.