The CBOE Volatility Index, Wall Street’s fear gauge, climbed 7% on Wednesday amid the sell-off in stock and precious metals exchange traded funds.
Volatility-linked exchange traded products such as iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX), VelocityShares Daily 2x VIX Short Term ETN (NYSEArca: TVIX) and ProShares VIX Short-Term Futures ETN (NYSEArca: VIXY) followed the VIX higher.
Some traders use these products to hedge long portfolios or speculate on market pullbacks. The funds are designed as trading vehicles that track VIX futures contracts, rather than the spot price.
Investors Intelligence technical analyst Tarquin Coe said the VIX rising on Tuesday along with stocks was a warning signal.
“Normally one would expect the VIX to be flat to down on an equity up day. The technicals provide a possible explanation in that the indicator, or fear, is deeply oversold,” he wrote in a newsletter Wednesday. “That is a flashing red light as fear may need to surge to alleviate the oversold condition. Such a move would of course coincide with a sharp daily equity sell-off, a move which could erase the recent run very quickly.”
Low volume during the recent equity rally raises doubts over its sustainability, the analyst added.
“As well as high complacency, further critical bearish evidence comes from our advisors sentiment survey today which shows the bullish advisors at 50.5%, the highest level since the May top,” Coe wrote. [ETF Espresso: Advisor Sentiment Rises with Market]
Another warning is the outperformance of utilities ETFs, he noted. [Dividends Power Utilities ETFs in 2011]
“Leadership from the most defensive sector is not indicative of a healthy bull market. In such a market the utilities would be trailing by a large margin,” he said.
