CBOE S&P 500 Volatility Index (VIX) Breaks Above Resistance
Posted in CBOE Volatility Index (VIX) on July 31st, 2011 by admin – Be the first to commentBy Jim Donnelly, Olson Global Markets
With no “debt ceiling†agreement achieved last week (or by this writing), and with the August 2nd deadline quickly approaching, equity investors became increasingly worried last week. By the close of Friday’s session, growing frustration caused investors to push the CBOE S&P 500 Volatility Index (VIX) above key trend line resistance at 23.65. A weaker-than-expected Q2 GDP report and the threat of a rate downgrade to U.S. Government bonds helped increase the gloom. In Europe, a warning by Moody’s that it might soon lower the credit rating on Spain’s sovereign debt as well as on four of Spain’s key lenders was another big negative.
That being said, it is important to note that each of the last two (2) times the VIX broke above similar types of resistance (on 9/15/08 and on 5/4/2010), the S&P 500 Index declined by 44.1% (from 1192.70 to 666.79) and by 13.9% (from 1,173.60 to 1,010.91) respectively. Interestingly, the jump in the VIX after 9/15/08 (from 30.25 to its peak at 89.53) represented a 195.3% move in the volatility index itself, while the VIX’s jump beginning on 5/4/2010 ran from 24.27 to 48.20 or less pronounced 98.6% rise.
Although a debt ceiling agreement of some sort might soon emerge with a “relief rally†erupting shortly thereafter, equity investors will still have to face an apparent weakening of the U.S. economy, if not a more disturbing global slowdown.