Lately I've been discussing the classic bear market sentiment patterns that are leading me to conclude this market has a big problem. A falling VIX together with falling prices is a highly distinctive bearish sentiment footprint.
Invariably at these moments, I get the same type of e-mails, and come across the same market commentary. The gist is this: "This time it's different. In bull markets the VIX can go into the teens, and stay there for months."
Since I'm getting these same types of letters now, I'm thinking we're within a week or two of a major top in the markets. This is how it's always worked.
People are quick to believe "this time it's different." It's just human nature. And it's one of the primary reasons why the VIX never seems to lose its power as a market timing tool. Only a tiny sub-set of market participants even know what the VIX is, and of that tiny sub-set only a small fraction have enough faith to trust it at important moments.
It's always best to keep it simple when analyzing the markets. Don't over think it. Don't perform convoluted analytical gymnastics to explain away things that have very obvious interpretations.
Sure, this time may indeed be different, and the VIX might go down to 12 while the Dow soars over 11,000.
But do you really think so?
This market is having a hard time even staying over the "home" level of SPX 876, much less make a run at higher ground. And all the while people get more bullish. I'm just not planning on over thinking that one."
"The point at which a competitor is pursuing the best possible strategy, given the strategies of the other participants" - John F. Nash
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