There is, arguably, no more important gauge of investor sentiment than the VIX. Market extremes are generally best seen by the extraordinary swings in the VIX. As we’ve recently described, the market has been on a drunken walk that takes it in one direction for a series of weeks and then suddenly reverses with the utmost conviction. This back and forth has been a hallmark trait of the range-bound market of the last few months.
With today’s invincible feeling in the equity markets the VIX has now fallen a remarkable 14 of the last 15 days. That’s a 93% win rate in a three week period. Not bad if you’ve been trading or hedging via the VIX. Unfortunately, this trend is more than unsustainable. This is the longest losing streak for the VIX since the March 2009 rally began and the few losing streaks that came even close were followed by sideways to down markets in the following 4-8 weeks.
The VIX has become a sure bet. As the old saying goes, if something seems too good to be true it probably is. The trend is your friend until it ends and this trend is beginning to look like a mighty bad bet to me. I’m not one to call tops, but as a manager of risk this indicator has me feeling a bit uneasy.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.