After a historic run in November, traders and investors naturally question sustainability.
One doesn’t have to look too far back in history to find similar pullback moves in the S&P 500, as shown here using a monthly chart of the SPY ETF and 10-month moving average.
If you study the chart a little closer, you notice just how historic the move in November has been. Compare the size of the November 2023 bar to the previous three bars inside my Hard Right Edge box.
Notice how November quickly surpassed October and September… And notice how it’s giving August a run for its money these last few days of the month.
Next, look at the U.S. dollar, shown here on Barchart.com as $DXY. It has been an inverse leading indicator to S&P 500 direction for quite some time. Notice the trouble it has when it crosses below the 10-month moving average.
Where do you think it’s heading in December?
The VIX Volatility Index
This brings me to the daily chart of the VIX, shown here on Barchart.com as VIY00. This index is often used to measure fear. It also has an inverse relationship to the SPY, similar to the dollar.
Many fear that the VIX is currently too low and must move up, implying a downward move in the SPY. After all, the VIX reading of 12.83 — 20 is “average” volatility — hasn’t been this low in the past two years!
Surely this is not sustainable coming off a bear market… Or is it?
Now look at the monthly chart over 30 years. It gives a very different picture… Notice the general levels on the chart at the 1995, 2007, 2018 markings, etc.
This shows that the monthly reading of 12.82 is a sustainable level. In fact, it can go lower and stay lower than anyone expects — even on an extreme monthly basis.
It takes years for the VIX to settle back to “normal” after extreme events like the dot-com bubble, the financial crisis of 2008, or the COVID-19 pandemic, which all tanked the market.
This is visible in the chart above.
“Wait a minute,” some people will exclaim. “What about the next extreme event our world seems to be quickly approaching?”
Very smart question… The VIX will not be the leading indicator of it. A catalyst will.
I’m not saying the VIX will stay at low levels for months to come, and that it’s time to kick back and relax.
I am saying that traders and investors might be well-served to put the VIX, along with the recent historic move of the S&P 500, into perspective as they approach December.
If you’re interested in the exact direction I see for December and the first quarter next year, join me at 4:05 PM ET on Thursday, Nov. 30!
Think and win!
Celeste Lindman
Celeste Lindman Trading
If you haven’t already, join my Telegram channel here for frequent trading insights and market musings!
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
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