Monday, June 1, 2009

Why Not to Read Too Much Into VIX on Big Market Up Day

Today the market is making a pretty significant move, yet the VIX is up. Many will read that as a sign the move is a fake move and thus, it is time to move heavy into shorting stocks.

Don't read too much into the VIX moving up on a Monday when the market is moving up. The VIX is just showing that there is instability in the market making such a quick move and will probably have some sort of correction soon. The problem is, that correction could be small.

I do agree that longs should sell into this strength and the VIX is indicating this. But it does not mean it is time to short stocks or take a full bear stance. As I have been pounding and pounding, DO NOT take a big short stance until the VIX crosses the 20 dma. I can't stress this enough and so many people have been going all in on the short side expecting the market has topped. It is fine to play some on the short side and I have been all along but until the VIX gives a clear indicator that the sentiment has changed, you just can't over extend.

2 key indicators that the market is going to take a lot of the gains back...

1. The VIX passes the 20 dma for 2 days straight
2. the SPX 20 dma passes the 50 dma on the negative side.

Those two are sure TA signs that the market sentiment has changed. Until then, you have to sell into rallies and buy on dips.

For me, I am selling the small long positions I have as I write and also buying SDS looking for a 10% gain and then exit.


  1. I know you're a big CRE bear but I have to warn against it. The reason why I'm leery about it is b/c the Feds are keeping the CMBS spread narrow through ABS and Treasury buybacks. According to the Feds, US economic recovery is built on 2 legs:

    1) CRE
    2) Regular home mortgages

  2. I have been playing SRS on trades lately as it sits in a range. Today I bought a handful of shares and also bought some Oct 30 calls. Playing SRS more cautiously these days but it does tend to have 10-20% swings in this range so I am good with it. I will probably miss the big rally when it does happen so that is why I decided on the Oct calls.