The VIX went above 30 yesterday. Will it turn out to be a Dark Cloud or Silver Lining?
A VIX level above 30 has been an important number this year. On 3 occasions, January, March, & July, the VIX closed above 30 and that marked a short term bottom in the markets. That wasn't always the case in prior years.
In any event, pit traders took notice of it a few weeks ago and were planning to be buyers when that occurred.
At least until yesterday when the financial markets were in such disarray. Lehman and AIG problems have the market in turmoil with the Fed rushing in and injection 50 billion dollars of liquidity. Truly, the market's background condition is not the same this time.
None the less, the current VIX level is important along with the level of historical New Lows as seen and explained in the second chart.
Let's start looking at the VIX for this year. Our first chart shows the VIX and how a level of above 30 has been the market bottom during 2008. This occurred 3 times ... January, March, and July. The question is will yesterday's level of 30 be the same?
Underlying market fundamentals are much worse this time, so that raises the possibility of panic selling to continue. At the same time, the Fed is prepared to take any necessary unusual action during the day today. Before the open, they are going to make a very LARGE injection of liquidity into the system. And then ... during the day ... they will inject more later in the morning or this afternoon as required. Liquidity is also being injected on a worldwide basis today. See the next chart ...
Below is the chart showing the level of New Lows going back to 2000 ... a length of time that covers the last Bear Market.
Note that "over 700" on New Lows has been a historically important level. Back in 2001 and 2002, above 700 marked the bottom of some pretty ferocious down moves.
In the past 12 months, we have had a slew of such events above 700. Yesterday's New Lows level came in at 622 ... just below the 700 mark.
The Fed will be working on steroids today, trying to stem any further down fall in the markets and worldwide liquidity problems. It would probably be better for the New Lows to hit above 700 today in order to get a washout capitulation. That could clear the air for a counter bounce to the upside. But the Fed is worried about a bigger risk today ... the possibility of a 1987 style crash.
Today will probably be "a day to remember" for you ... the Fed is either going to bring back more stability or lose control and witness an ugly downside. There may be one helpful event today if it happens ... inside rumors are that Barclays will announce the full purchase and acquisition of Lehman sometime today. It would certainly be an event that the market needed to see.
