There are a number of indicators that aren’t aligned with what we’re seeing within the stock market. Probably the most glaring example is the VIX, or volatility index, which I’ll get to in a moment. If you desire to make smart trading decisions, start paying more attention to cost motion in 2023.
The VIX has been acting weird
The VIX simply measures the demand for puts and calls on the SPX 500. It normally rises when the demand for put options increases and goes down the demand for call options increases. The VIX has not been doing this, even when the market makes big moves up or down. Some have even said the indicator is broken; I can only chuckle after I hear that. When an indicator isn’t behaving “normally” or giving us probably the most accurate information based on current market conditions, it’s frustrating.
With the VIX, we’ve seen small bumps higher when the market gets slammed, while only small moves downward when the market goes higher. For the month of December, the VIX was up 5%, which isn’t a small amount. Nonetheless, the SPX 500 was down 6.15% in December.
Should you examine other down months for the SPX 500 in 2022, you’ll see large jumps in volatility. For instance, the VIX climbed sharply in August (about 20%) when the SPX 500 plunged 5% after being higher mid-month.
So, what gives here? The SPX 500 was down by around the identical amount each months, yet the VIX offered up very different volatility readings.
There are a myriad of explanations for the very odd behavior of VIX. Some are valid while others should not. But that’s not the purpose of this blog post.
One thing each months had in common was poor price motion.
Listen to cost motion in 2023
Never place all your faith behind one indicator, whether it’s the VIX or something else. They’re all secondary indicators to cost motion, and sometimes they should not in sync. As a long-time technician, I all the time let price motion have the last word when evaluating a chart.
Who knows how long the VIX will act weird, so listen to cost motion in 2023 – even greater than you normally do.