Daily Investment Interpretations

July 25, 2008

2008-7-25:  I have moved the S&P 500 index chart down to just above the VIX chart, and have added a 10-year VIX chart just below the 10-year S&P 500 chart. The one-year S&P chart is similar to an  upside-down, one-year VIX chart. But notice the 10-year S&P 500 charts and the 10-year VIX charts: when the bull market began in March, 2003, the VIX dropped steeply from values above 30 to around 22.5 by mid-April, 2003, and then worked its way down below 10 by December 18, 2006, only gradually climbing into the mid-teens by the time the S&P peaked on July 17, 2007. The message: the VIX can remain low (with occasional spikes) for years on end while the stock market is recovering from a major bottom. This agrees with Mark Hulbert's admonition that the VIX is a poor predictor of stock market action.
    One of the financial newsletters to which I subscribe has observed that, so far, the stocks that have have fueled this mini- rally are in those areas that have been beaten down the worst. In other words, we're seeing  reflexive bounces in groups like the financials that have been oversold. It remains to be seen how far this rally will go. (It might be worth noting that when the indices hit bottom on July 15th, we didn't have the climactic selling that signals the capitulation of the bulls.)