On Friday March 16, 2012 VIX reached an astonishing low level of 13.66. This demonstrates an incredible complacency toward the possibility of a bear market even though we had a terrible one in 2007-2009 and smaller slumps in 2010 and 2011. We have not had the VIX at this low level since June of 2007. Savvy investors usually consider a reading below the 16 level as a bearish indicator for the stock market.
On Tuesday of last week, some of the widely followed equity ETFs (e.g. QQQ, SPY, and IWM) experienced their highest percentage gains in several months. Whenever these lagging indicators (versus leading indicators such as raw material producer ETFs) develop a vertical ascent near the end of the day, it is usually a sign of an upcoming bear market.
Those who primarily track the widely popular indicators, and create a critical mass by all buying or selling simultaneously, can hardly be expected to pay attention to the increasing negative divergences. It is also important to note that these divergences are currently intensifying just as most investors believe that the market is getting strong and gathering momentum.
Most people act emotionally rather than rationally when it comes to trading. Highly experienced traders have witnessed the following pattern over and over again: when the fear is low (VIX) a bear market is around the corner; when the fear is high the market is ready to advance.
When the financial markets are forming the most extreme highs and lows, ETF Trade Advisor can generally make substantial gains with our market timing strategies.
The following article relates to our present investment strategy.
Market Keeps Rising, but Who’s Doing All the Buying? By: Jeff Cox CNBC.com Senior Writer