KEEP AN EYE ON VOLATILITY -- 50 DAY MOVING AVERAGES ARE STILL HOLDING

VIX IS TESTING OVERHEAD RESISTANCE ... One of the hallmarks of last year's strong stock market was unusually low market volatility. Some market strategists expect volatility to pick up this year. If it does, it could make for a more difficult year for stocks. That's because rising volatility is usually identified with a more choppy stock market. Which is why I thought you might be interested in a close-up view of the CBOE Volatility (VIX) Index in Chart 1. The main thing to remember about the VIX is that it usually trends in the opposite direction of the stock market. That means that any upside breakouts in the VIX are usually accompanied by stock market corrections. That hasn't happened yet. But it came close yesterday. Chart 1 shows the VIX moving up to challenge its December high and its 200-day moving average around 13. Any close over 13 would constitute an upside breakout in the VIX which would most likely coincide with some stock selling. The good news is that the VIX has backed off from that resistance barrier. But it's worth keeping an eye on.

Chart 1

A LONGER RANGE LOOK AT THE VIX ... Chart 2 compares the VIX to the S&P 500 (blue line) during the four-year bull market in stocks. Notice that the stock market troughs in late 2002 and early 2003 coincided with peaks in the VIX (see arrows). Each subsequent upturn in the VIX has coincided with a bull market correction. The most recent occurred last spring (see circles). The stock market remains in an uptrend, but is very over-extended. At such times, it's a good idea to watch for any signs of a downturn. One of those signs would be an upturn in the VIX. Another would be the breaking of 50-day moving averages in large-cap indexes.

Chart 2

50-DAY MOVING AVERAGES ARE STILL HOLDING ... Over the weekend, I showed that several daily indicators had turned negative, while longer-range ones were still positive but overbought. Despite those cautionary signs, the most important indicator is the price trend of the market itself. I've suggested several times that I consider the 50-day moving average to be one of the best market indicators around. It's extemely simple, but it works. An uptrend exists as long as prices stay over the 50-day line. A decisive close below that line is usually the first sign of a market correction. The three main market indexes shown below are in the process of testing their 50-day lines. So far, the lines have held.

Chart 3

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