Saturday, October 23, 2010

The VIX & The TRIN Are Neutral

There has been a lot of commentary in the media recently about investor and trader sentiment. Some soft measures of sentiment based on polling data suggest traders may have become overly optimistic. The media headlines offer a mixed picture as pundits are saying that everyone's bearish, and therefore investors should be buying. This rarely works out. It seems to be an attempt to rally the troops - a thinly veiled one at that.

An example is recent articles arguing that the VIX has reached an extremely low reading suggesting complacency. We did have a VIX sell signal on October 11 when the VIX closed below its 20 day x 2.0 SD bollinger band. The SP500 has basically treaded water since then, but that type of sell signal need not indicate a major top.

Using the 20,5 PPO when can see how the VIX is doing on a relative rather than an absolute basis. The extreme low readings of the oscillator came in May after the flash crash. Since then the VIX has traded in the "neutral zone" though it has reached the upper end of the neutral zone range. A touch or pop above the red line may indicate a near term top, but unless we see a falling tops pattern, we cannot draw any further conclusions. Extreme low readings do in fact appear to precede important market lows, and extreme high readings appear to occur at the swing high before the final low. We'll keep watching this indicator, but for now it is not telling us much.

The 5,20 PPO of the TRIN is harder to interpret. It is certainly neutral at the moment, but what is interesting is the fact that the oscillator has not moved higher with the rally. This indicates a lack of true buying interest. Notice how the indicator remained low in the range during most of the March to August period of 2008. Even though the market made two rally attempts that summer, the TRIN did not confirm the rallies. Compare that with February 2009 to April 2010 and note the frequent spikes to the red line indicating strong buying interest.

The fact that the Nasdaq 100 has broken out to new rally highs while most other indexes have lagged considerably coupled with the clear lack of buying interest as shown by the TRIN oscillator supports the view that we are currently in a false rally. Until we see spikes in the TRIN oscillator, we should assume that a significant correction will follow once the current rally from the July low is finished.


John Hight said...

Dear Craig,
From what I've read, the TRIN is inverse to the market, and so, a high TRIN means that more volume is going into declining shares than into advancing shares. The high readings in April 2010 (4/16 and 4/27 in particular) were associated with high volume down days. Therefore, a climbing TRIN in the face of a rally implies a waning of buying interest. The charts designated A3 and B5 on my StockCharts public page explore this relationship. I enjoy reading your blog.

R. Craig Pritchard said...


Thanks for your comment. I should have done a better job explaining that I reversed the usual parameters in the PPO that a low PPO reading would correspond to a high TRIN reading and therefore with a market bottom, and vice versa for a low TRIN reading. Thus, the PPO oscillator should correlate with highs and lows in the market.