As usual, the most comprehensive stack of technical analysis comes from Goldman's John Noyce who is rarely afraid to go out on a limb. Among the key charts to track, number one is the VIX which recently blew out to prior resistance levels at the 49 mark, which happens to have been the peak during the October 1997 Asian Crisis, the October 1998 LTCM crisis, September 11, the July 2002 equity bear market, and the first Eurozone insolvency in May 2010. For now this level has held, and with major central planner intervention it appears that a base is now being built below it. Of course, all this means is that when the current round of global intervention fails the deferred risk will simply send the VIX to new unseen heights. The only question is when.
More details from Noyce:
The VIX moves to the “make or break point” and holds for now…
This seems to make it reasonable to argue that markets can now enter a period of consolidation following a move to targets in many risk appetite correlated FX pairs and equity indices
- This is a very similar chart to that which has been included in a number of the daily/adhoc updates over the course of this week. It does appear important to focus on it heavily at times of market dislocation such as this as it gives a guide as to how much bad news (or maybe better put; fear) is priced into the market.
- Looking back over the past 15+ years, with the material exception of Q4’08, all major cyclical peaks in the index have been set between 48.20 and 49.53;
- October ’97 – Asian Crisis
- October ‘98 – LTCM
- September ‘01 – 9/11
- July ‘02 – equity bear market
- May ‘10 – Eurozone funding crisis
- Under “normal” market conditions this all tends to argue that now’s a good time to take a more neutral stance towards risk appetite correlated markets and to watch how price action develops.
- Thinking ahead, if at any point the index does push beyond 50, it would be a clear warning that a far more negative backdrop was likely in the process of developing. The only time this has happened over this time frame being in Q4’08 (and for full disclosure the index did also move very marginally above 50 in Q1’09).
- From a pure technical perspective a push above the May ‘10 high at 48.20 would complete a double bottom like pattern with an extrapolation target of 81.25.
And for the correlation types, here is the VIX and the S&P
Although the finer points can be debated, the basic relationship between the VIX and S&P is that, with the exception of Q4’08, when the VIX moves close to 50 the equity market has historically been at, or very close, to stabilising. Subsequently it tends to at minimum enter a period of consolidation or alternatively begin the process of building a significant base
Really again this leads back to the same conclusion as on the prior slide. The fact the VIX has been to 48.00 doesn’t itself mean it’s time to run head-long into risk appetite correlated markets – there could still be significant volatility, but it does argue that a more measured and “tactical” trading approach probably now makes sense.
With this in mind, from here it seems best to be open minded to signs of a base developing on risk appetite correlated markets. But with a very clear “stop” on that theme if the VIX begins to push above 50 (only seen in Q4’08 and would complete a double bottom on the index targeting 81.25).
Much more in the complete packet below. And for the lazy ones out there: no podcast this week.