Friday, August 14, 2009

The VIX Is Telling You - September Is Going To Hurt

As the market has rallied with reckless abandon the last 5 weeks or so, option traders have started to increase their bets on the sell side. The rally we have seen in the SPX is the largest/steepest rally since 1930.

September is usually the worst month for equity investors, partly because equities do better in the summer, as they are easily pushed up by a general lack of participation and volume. When the big boys come in after Labor Day, they usually bring the pain. If you remember in both 2000 and 2008, after decent summer runs, the markets took on the chin in September.

I have written a few times on why the VIX is telling us the rally is over, every time the market seems to rally another 10 points or so, but this gauge cant be continuously ignored. At the moment, the CBOE VIX Futures are forecasting a 13% increase in volatility. This increase hasn't been this large since August 2008.

tradersutra.blogspot.com/2009/08/definite-divergence-occurring.html

tradersutra.blogspot.com/2009/07/markets-rally-yet-volatilty-stalls.html



As you can see the VIX futures are all trading above the actual VIX Index. This basically shows that investors are expecting stocks to retreat over the coming months. If investors feel volatility will increase then there is going to be downward movement in equity prices.

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