For the VIX, "I Fallen and I can't get up!"

I evaluate the VIX index in a variety of ways. I recently reported on my NDX 100 versus VIX model that has been very reliable over the years and it showed that the NDX continues outperform the VIX - a key variable for a bull market. Another model I use is one that measures the VIX using the 13 week MA along with a range level setup every 5 points - in other words a break through 25 to the downside is a bullish move for stocks and vice versa. For the most part since the 2009 lows, the 13 week MA has been in a falling trend with the exception of the spring of this year that featured the high volatility event of the decade thus far - the flash crash! Once things in the marketplace calmed down this summer, the index resumed its move lower and is now closing in on support on average around the 20 level.

This is where the rubber meets the road so to speak. A break on average through the 20 level could send stocks much higher than the 1300 level limit that I think is possible for the year. During the 2000-2002 period, the average never broke through the 20 level for the most part with fireworks showing up each time. As we approach the end of October, a month historically known for fireworks, perhaps things are now setting up for that break lower. A break lower could create a more methodical move higher for stocks than the one we saw from September onward - or participants are pricing such a fall in volatility in based on the constant buying in the markets? Tough call. All I can say at this point, when combined with my NDX/VIX Model, volatility is trending lower.

In terms of positioning, I unloaded some VXX last week on the dive lower and sold the rest today on the rally. I continue to hold some VIX futures positions but I have shifted my hedges to shorts in the indexes outright.

Related articles

• Trading the VIX (investingwithoptions.com)
• Market Volatility: The New Normal Or The Calm Before The Storm? (businessinsider.com)
• Is the Market Ready to Roll Over? These Signs Say Yes (dailyfinance.com)
• Reading the VIX: What the 'Fear Index' Is Saying Now (dailyfinance.com)