The CBOE S&P 500 Volatility Index Jumps Sharply; More Volatility Likely

By Jim Donnelly, Olson Global Markets

In a week that witnessed a bubble bursting in the Silver markets and an upward reversal in the heavily shorted U.S. Dollar Index (DXY), the CBOE S&P 500 Volatility Index (VIX) jumped smartly accompanied by deeply oversold conditions. In the absence of an interest rate hike in Europe, and in the wake of the demise of Osama Bin Laden, the ever present “risk” trade began to unwind.

Back-to-back margin requirement increases announced for Silver futures appeared to shake out many speculators initially. Selling activity intensified, however, following the revelation that both George Soros and Carlos Slim had either sold, or hedged large silver holdings by mid-week.

Amid reversals in both the dollar and precious metals, the S&P 500 Index suffered selling pressures as well. This was clearly reflected in last week’s jump in the VIX. Importantly, its weekly chart reveals that deeply oversold conditions continue to be present even after last week’s sharp upward move. In turn, this condition suggests that the recent upward thrust in volatility has likely more room to run. Key trend line resistance, although downward sloping, nevertheless sits at the lofty level of 27.50. That hints that the recent downward move in equity prices may also have more to decline. This is not to say that the “Go Away in May” slogan has kicked in with thud. But with the end of QE2 expected in June, “risk” taking of all sorts may get pared back in the weeks just ahead.

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