At InvestingHaven, we work with a set of leading indicators to understand market direction. One crucial component of our array of leading indicators is a set of 6 volatility indexes. We analyze all 6 volatility indexes in detail in our weekend analysis in Trade Alerts. In this short post we feature one of the volatility indexes that we closely track. It shows a breakdown in progress and the structure we observe on the chart comes with a very important market insight for the 2nd half of 2022.
First of all, the volatility index that we feature in this article is the far term volatility index. It tracks volatility that the market expects between the short and medium term for the S&P 500 index.
As a reference, the very popular VIX index is the wildly followed volatility index. However, it is not the only one, there are many more.
Each volatility index has its own dynamics. VIX, for instance, has a short term focus. Typically, VIX and the S&P 500 move in the opposite period in a timeframe of 48 to 72 hours.
Also, reading and understanding volatility indexes is a specific skill. As seen in this article it is very easy to be completely wrong when reading VIX.
That’s why we developed a unique set of 6 volatility indexes that, all combined, create a clear picture of what to expect in the market.
The volatility index we feature in this post has a few messages:
- It created a very clear topping pattern. We noticed this 3 weeks ago, as it happened, and reported it our mid-July weekend alert to our members. Note that we did so almost the exact same day as the article we referenced above (in which the author reported that VIX would rise). Looking at a set of volatility index and getting the chart right will prevent you from misunderstanding upcoming levels of volatility.
- This volatility index is even breaking down. There is a structural change in the chart setup of this volatility index. In fact, this is happening exactly the same moment the shorter term oriented volatility indexes already broke down.
All this implies that volatility will get down in the 2nd half of 2022. While we saw unusually high levels of volatility for an unusually long period of time in the first half of 2022, we expect much lower levels of volatility with only a few spikes up.
Note that our volatility analysis is confirming what we observed lately in our crash indicators (bond yields, negatively correlated to Treasuries like TLT): Crash Indicator Says The Stock Market Decline Came To An End. It is re-assuring to get confirmations from different indicators.
This implies that investors can buy the dip in the next few months particularly in sectors and stocks that have shown relative strength. For trades, it means that risk management practices can go slowly but surely go back to ‘normal’ (from very strict).
You too can receive our weekly volatility analysis by becoming a Trade Alerts member.