Tuesday, May 27, 2014

Is The VIX Broken?

Markets are off to a strong start.  The S&P 500 is making a new high.  Financials are leading the early action, and Bank of America is leading the financials after it resubmitted its capital plan to the Fed for review.

There was some positive economic data today also.  The Case-Shiller home price index rose 12.4% in March.  And while this data is already a bit old it does show that the slowdown we thought hit the housing market in March may not have been as pronounced as we thought.  Separately, durable goods rose 0.8% in April.

The volatility index (VIX) is 3% higher this morning, but only to 11.70.  The low levels hit on Friday were seen once last March, but before that you have to go all the way back to 2007 to find levels this low.  The question is are we ushering in a new range for the VIX in the 10-15 range like we saw pre-2007?  Or is the low VIX today lulling investors into a sense of complacency before ushering in another volatile period in the markets?  Time will tell.  But as the VIX hit 21 just a few months ago, we are leaning toward the latter scenario.

Asian markets ended mixed overnight.  Europe's markets are mostly higher today.  ECB's Draghi gave a speech yesterday and hinted at the prospect of more easing next month.

Oil prices are down slightly near $104.15.  And gold prices are breaking down and falling to $1268 after failing to overtake the $1300 level last week. 

Trading comment: Hard to fade the strong price action.  The SPX is making new highs, the NDX is close to joining in, and the mid-cap index is back above its 50-day average.  People have complained about the lower number of stocks making new highs, and that is a valid argument.  But we still have to respect the health of this market.  Narrowing markets can still go on to make new highs for awhile before running out of steam.  And it remains to be seen if there will be a new leadership group stepping up to take over for social media stocks and biotech.

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