He found that past instances of where the market fell a lot but the VIX did not respond in a corresponding fashion foreshadowed further stock market weakness.
Where is the wash-out?
I had also been concerned about the apparent lack of panic during the latest market slide. My Trifecta Bottom Model, which was first described here, uses three somewhat uncorrelated components to spot short-term market bottoms:
- VIX term structure inversion: Which measures rising fear in the option market much better than the absolute level of the VIX Index;
- TRIN: When TRIN is above 2, it is often an indication of capitulative price-insensitive selling, otherwise known as margin clerk market; and
- OBOS: This is an intermediate term oversold indicator which indicates an oversold condition when the indicator falls below 0.5.
The Trifecta Bottom Model has been uncanny in spotting bottoms in the last three years. The chart below shows the record of this model in the last year, where the blue vertical lines indicate that two of the three components have been triggered (Exacta signal) and the red line indicates that all three were triggered. All marked short-term bottoms. The latest bout of stock market weakness saw TRIN hit a high of 1.97 (not quite 2.0) and the OBOS reach a low of 0.52 (not quite 0.5). Are these readings close enough to trigger a buy signal?
The full post is at our new site here.
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- Why I am bearish (and what would change my mind) May 2015 (red arrow below)
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- Why this is not the start of a bear market September 2015 (purple arrow below)
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