Here we show a nice relationship between the VIX and the SPX. While this is a commonly referenced pairing, many still challenge the value of using the VIX as a market indicator. There are numerous ways too use the VIX and almost everyone has their own tweaks. This chart shows a very clear inverse relationship with several distinct “phases” discernible in the value of the VIX. These “phases” correlate well with the action in the SPX. We have labled these phases “euphoria”, “fear” and “panic”. We also included the 400 day moving average (equivalent to the 80 week) which we discussed previously in The Significance of the 400 day (80 week) moving average. This bull/bear market reference point matches up very well with the action in the VIX, as the VIX moves into the “fear phase” just as the 400 day is coming under assault, before eventually breaking. A final test of the 400 day from below, which we highlighted in late April 2008, was accompanied by one last dip into the “euphoria” zone for the VIX. That was the “last chance” to get out before the drop gathered steam as the SPX then dropped over 50% in less than 12 months.
We added the notes on Bear Stearns and Citigroup for a consensus of the “expert” opinion at the time.