There are a host of indicators that aren’t aligned with what we’re seeing in the stock market, notes Bob Lang of ExplosiveOptions.net.
The most glaring example is the Cboe SPX Volatility Index (VIX), or volatility index, which I’ll get to in a moment. If you want to make smart trading decisions, start paying more attention to price action in 2023.
The VIX Has Been Acting Weird
The VIX simply measures the demand for puts and calls on the SPX 500. It normally rises when the demand for put options increases and goes down as the demand for call options increases. The VIX has not been doing this, even when the market makes big moves up or down. Some have even said the indicator is broken; I can only chuckle when I hear that. When an indicator is not behaving “normally” or giving us the most accurate information based on current market conditions, it is frustrating.
With the VIX, we’ve seen small bumps higher when the market gets slammed, while only small moves downward when the market goes higher. For the month of December, the VIX was up 5%, which is not a small amount. However, the SPX 500 was down 6.15% in December.
If you examine other down months for the SPX 500 in 2022, you will see large jumps in volatility. For example, the VIX climbed sharply in August (about 20%) when the SPX 500 plunged 5% after being higher mid-month.
So, what gives here? The SPX 500 was down by around the same amount in both months, yet the VIX offered up very different volatility readings.
There are a myriad of explanations for the very odd behavior of VIX. Some are valid, while others are not. But that’s not the point of this blog post.
One thing both months had in common was poor price action.
Pay Attention to Price Action in 2023
Never place all of your faith behind one indicator, whether it’s the VIX or something else. They are all secondary indicators of price action, and sometimes they are not in sync. As a long-time technician, I always let price action have the last word when evaluating a chart.
Who knows how long the VIX will act weird, so pay attention to price action in 2023—even more than you usually do.
Learn more about Bob Lang at ExplosiveOptions.net.