Recent movements in the S&P 500 Volatility Index (VIX) and the Put/Call ratio (PC) reveal some fascinating signals.
The daily VIX and S&P 500 (SPX) chart courtesy of Trading View show a short- term signal and examples of intermediate – term signals.
First a short – term signal. Note that on 12/12/22 the SPX had a move up of 1.4% while the VIX had a large move up of 9.7%. This is rare and unusual, the VIX and SPX normally move in opposite directions. The VIX rises when there’s relatively more buying of Put vs. Call Options. Traders are making downside bets, and at VIX extreme highs it’s a signal of a possible stock bottom.
It appears that on 12/12/22 traders were loading up on Put options ahead of the U.S – CPI report due out at 8:30 AM – ET.
After the report was released on 12/13/22 S&P – futures had a huge move up and the SPX gapped up on the open. In the short term some bears probably took losses, others holding on had to endure intense pain before the trade went in their direction.
This phenomenon could happen again. If there’s a VIX spike up with an SPX rally, it could be a great signal to hold off on shorting/selling until at least the next day.
There were two Intermediate VIX signals made in June and October. Note that after a VIX high there’s a lower high that corresponds with a lower SPX bottom. This is a sentiment divergence; it shows that fear is lessening as the SPX makes a lower low. Both VIX divergences signaled intermediate SPX bottoms in June and October.
The next daily chart shows the relationship between SPX and PC.
The sentiment divergence phenomenon also occurs with PC. Note the previous signal made at the October bottom was effective. This PC signal, along with the VIX signal was illustrated in this websites 10/16/22 blog “Momentum and Sentiment Update – 10/14/23”.
Also note that within the SPX September to October drop there was another sentiment divergence that signaled a multi- day rally.
Investor’s Business Daily uses readings above 1.15 as a signal for potential US stock market bottoms.
Note that on 12/16/22 PC moved marginally above the 1.15 level and was diverging off of the reading made on 12/07/22.
This sites prior blog noted “There’s a good chance that on 12/19/22 the SPX could continue going lower.” If the SPX does decline on 12/19/2 and bottoms in the Fibonacci support zone of 3,796 to 3,806, it could be the start of at least a multi- day rally.