The financial news these days makes it clear that the world economy is on shaky ground. "China's bubble"; "high U.S. unemployment"; "uncertainty about interest rates"; "sovereign debt problems in Greece"... You'd think that in this environment, the financial markets would be as jittery as some of the commentators are. But they aren't.
The DJIA, the world's benchmark stock index, has rallied since a February 5 low. The Chicago Board Options Exchange’s VIX index (the "fear" index) also shows that the markets are not nervous. The British Financial Times picked up on this on March 8 (italics added):
The Vix index, a measure of expected market volatility, hovered around its lowest levels for the year at 17.63... The Vix has closed down 16 out of the last 18 sessions -- we haven’t seen it do that in such a consistent manner since 1997. [The low level] suggests that the Vix is not fully reflecting the amount of risk in the market right now...
We've been here before. In May 2008, three months before the AIG and Lehman troubles shook Wall Street, our monthly Elliott Wave Financial Forecast (EWFF) reported:
High volatility tends to follow low volatility, and volatility is always greater on the downside. The "impending ‘heart attack'" should generate some of the most pronounced volatility in history.
The "heart attack" that stocks suffered in 2008-2009 pushed the VIX to an all-time high of 89.53 (October 2008). Our June 2009 EWFF picked up the volatility theme:
After surging to an all-time high of 89.53 in conjunction with the end of wave (3) of 1 in October, the VIX fell to below 30 last week... reflecting a lessening fear of falling stock prices. Odds are that the VIX will fall into the low 20s or possibly even into the teens prior to the end of the current bear market rally.
That brings us to the recent 17.63 VIX reading -- "the teens," just as the EWFF expected. By itself it's no guarantee of anything; no indicator is. But when you see the DJIA's latest Elliott wave count and other technical evidence, the picture gets clearer. See it first-hand now in the March 10 issue of our Mon.-Wed.-Fri. Short Term Update and the March EWFF. Click to start now, risk-free.