Short-term Outlook:  Neutral  From Feb 26, 1107 SPX

Equity Indicators - Updates and Extremes

CBOE Implied Volatility Index (VIX)

The VIX is commonly referred to as the "fear gauge", and along with the Investor's Intelligence survey, has taken on the mantle of one of "the" sentiment indicators to watch.  I don't happen to agree with that, but I don't set the rules.

Very quickly, the VIX measures how volatile options traders believe the S&P 500 will be over the next month or so.  The more uncertainty (i.e. fear) there is in the market, the higher the VIX will usually go;  the more complacent traders are about stocks' prospects, the more it will drop.

The investment blog Pragmatic Capitalist noted an interesting development with the VIX yesterday - it has dropped every day but once over the past three weeks.

Going back to 1986, this is a new all-time record.  It has never done it before.

There have been a handful of times it has managed to drop 13 out of 15 days.  The following table shows how the S&P did afterward:

The results were fairly weak, at least in the short-term of up to a week later.  There were a few big gainers when looking out a month, so nothing too terribly distressing there for the bulls.

It's tough to read a lot into so few (and inconsistent) occurrences, so let's relax the parameters and look at 12 out of 15 down days:

Here we continue to see the pattern of short-term weakness.  The next day, the S&P was only up 19% of the time (though we've already bucked that stat this time around as the S&P has risen for the past two days).

Up to a month later, the average return in the S&P was negative and modestly below random, though again there were a few large gains in there and probability-wise, the chances of an up market weren't all that different from any random time.  After three months, the chances of an up market were considerably less kind, though the average return was right in line with random.

The takeaway?  Well, short-term weakness would be the best answer, but we've already violated that tendency.  From here, I would still suggest short-term weakness is more likely than strength, but I can't have much confidence in that because of the past couple of days.