Market Lab Report - VIX hit all-time lows today. What does this mean for markets?

Published:

24 Jul 2017 16:41 ET

Ultra-low readings on the VIX tend to be short-lived as markets tend to stage minor corrections to bring the VIX back in line with its trading range. Notice how since 2016, the VIX establishes a trading range for a number of weeks, then establishes a lower trading range sometime later.

Trading Ranges:

Mar '16 - Jun '16 = Roughly 12.5 to 16.5
Jul '16 - Sep '16 = Roughly 11 to 14
Dec '16 - Apr '17 = Roughly 10 to 13
May '17 - Jul '17 = Roughly 9.5 to 11

So even though the VIX hit new all-time lows of 9.26 in today's trade, it does not mean a serious correction is near. With quantitative easing (QE) at all-time highs from global central banks, the US stock market is unable to establish any meaningful corrections as it is the direct beneficiary of QE. For example, corporations use QE to buy back stock pushing prices higher and reducing the float, thus artificially boosting earnings.

That said, the US stock market may encounter headwinds in terms of making any real upside progress while the VIX lingers around all-time lows. If history repeats as it has since 2016, the VIX in the coming weeks will establish a lower trading range, perhaps from 8.5 to 10, or equivalent.

In the process of establishing this new lower trading range, the stock market may undergo a minor -3% correction as it has so far this year in March, May, and June of this year. Notice how the VIX has had minor spikes each time. When such minor corrections have occurred, leading stocks tend to fall at least twice or three times as much as the major indices. Thus our continued guidance to keep stops tight and sell when a stock's price gets ahead of itself in context with its chart.

And just as importantly, keep a close eye out for reentering your positions as leading stocks will often undercut prior significant lows, then rebound, offering a low risk reentry point. We call this the Wyckoff undercut & rally pattern and is one of a number of time-tested buy points that have worked very well in this QE-manipulated market. Examples are shown HERE.

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