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Tags: Indicators | Looming | Correction | stocks

Several Indicators Hint at Looming Correction

By    |   Tuesday, 20 March 2012 08:31 AM EDT

During last week’s rally, the financial news was fascinated with the S&P eclipsing the 1,400 level for the first time in almost four years. They seemingly missed another important level being eclipsed.

The CBOE Volatility Index (VIX) dropped below the 14 level for the first time since June 2007. When the VIX is low, investor complacency is high and the market is vulnerable. The 2007 reading came just a few months ahead of the all-time high in October of that year.

The VIX hasn’t been a perfect short-term trading indicator over the years, but when it has hit extremely low levels and reversed to move higher, it has been a good sign for playing the market more cautiously.

The VIX has not reversed dramatically higher since last Tuesday’s dip below 14, but it has moved higher.

It should also be noted that the trendline marking the downward trend in volume over the last five months was snapped last week.

During the last four and half years, there have been four clear downtrends in volume. Each time the volume spiked above the trendline, the trend in the S&P reversed.

The first downtrend in volume occurred in late-2008 through early 2009 and was snapped just ahead of the massive rally off the bottom.

The second one came in December 2009 and lasted until March 2010. The volume spiked in early April, just before the S&P suffered a 15 percent correction.

The third instance occurred through the first half of 2011 and was snapped in July as the market peaked.

Will the fourth instance serve as a warning? We will find out in the coming weeks.

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Tuesday, 20 March 2012 08:31 AM
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