VIX vs SP500

13 Jul 2017

I wanted to compare volatility with price action leading into trend failures. I wanted to see how complacent traders/investors were. Did they see the trend failure coming? Paying particular attention to the 2008 crisis, I can easily see distribution forming wedge patterns at market tops. This is what I would expect to see. Leading into 2008-9, I noticed volatility picked up, formed an accumulation descending wedge pattern before the real move occurred. The smartest money appeared to know well in advance while everyone else was waiting for confirmation, looking for an exit after an approximate 20% correction. I occasionally hear pundits talk about how a 15-20% correction is due. The problem is, in most cases, a 20% correction is followed by a crash. The only time I can see a 20% correction were a crash did not follow was AFTER the crash of 2008, off the lows. The 15% correction in 2015 definitely looked like the end of the world was coming. When I look at the last time a 20% correction occurred off market highs, it always led to a crash. So much for 20% then.

Look how compressed volatility is for the past two years. The smartest money isn't hedging yet, yet the distribution is obvious. Are the guys making so much money selling volatility that they are blinded? The current wedge forming on the VIX right now is the largest base I've seen on the product in a long time, and it's getting close to the breakout out range. Every time I see volatility get this historically low, a crash seems to follow. I don't know when the trend will fail, but it definitely looks like it's going to be rough when it does, or I'm completely wrong and unaware of something that I don't know.