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Fibonacci’s Greenblatt: Low VIX Volatility Could Be Bear Trap

By John Morgan   |   Monday, 26 Nov 2012 02:03 PM

The Chicago Board Options Exchange Volatility Index (VIX), curiously stuck at low levels while the stock market has generally been pointed lower, is actually primed for a bear market, according Jeff Greenblatt, editor of the Fibonacci Forecaster.

Greenblatt wrote in Futures magazine that the fact the VIX is down in the face of the recent stock market decline is itself eventually a negative.

The CBOE Volatility Index, or VIX, is regarded as Wall Street’s favorite barometer of investor anxiety. It often moves inversely to the direction of the stock market.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

“How could we possibly be at a low after the market got crushed again and have the VIX reading be more representative of a top?” he wrote. “This kind of behavior is representative of not only a bear phase, but a bear market.”

Greenblatt said he still expects a year-end “Santa Clause” rally, but he is bearish about what happens after the New Year. He said one reason the VIX is levitating at low levels is due to optimism that Congress will reach a fiscal cliff deal before the end of the year.

That optimism, expressed by both Democratic and Republican leaders at the end of last week, might have inspired short covering by bears. “They were close to gushing and I thought they were going to sit down and play bridge,” Greenblatt said of the Congressional lovefest.

Greenblatt noted that fresh data from the Philadelphia Federal Reserve suggested gross domestic product has suffered, particularly in the Northeast, as a result of heavy damage from Superstorm Sandy.

He acknowledged there are a few positive factors in play — he said Apple (AAPL), the U.S. dollar and the Philadelphia Semiconductor Index (SOX) appear to have favorable technical setups at the moment.

But they are outweighed by bear market risk factors. In particular, he noted conflicts brewing in the Middle East and no visible catalyst to lead the market higher after the fiscal cliff is resolved.

“With a VIX as low as it is, this is developing into a bear market psychology,” he wrote. “In bear markets the surprises are always to the downside.”

Reuters cited one stock market strategist who advised watching the VIX closely from here.

“Recently, volatility has increased in the market overall. You can’t really pick it up in the VIX yet, but I think as we get through November, I think you’re likely to see the VIX be at a relatively higher level,” said Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston.

The VIX often travels in a fairly broad range. In 2011, the VIX averaged 19.2 in July but 35 in August. So far this month, the average is 17.8, according to Reuters.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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