Last week was a volatile one for equity indexes, with big pullbacks on Monday and Tuesday, big rebounds on Wednesday and Thursday and another pullback on Friday making it the most bearish week of 2012, as various indicators turned moderately bearish for the first time since Feb. 3, 2012. This was only the second moderately bearish indication since mid-October of 2011.
The VIX closed above 20 on both Tuesday and Wednesday for the first time since very early March. This substantial increase has had a sizable effect on the 30-day historical average, which now stands at 106% vs. 85% at this time last week.
For the past several weeks, our comfort zone for the VIX was in the range of 16 – 18, so the fact that the VIX is now back above that level indicates that trader anxiety has come back into the market this week. As a result, we are downgrading the VIX to slightly bearish in the very near-term. The VIX remains neutral in the long-term for now.
A growing string of softening economic reports (NFIB, jobless claims, PPI, trade deficit, consumer sentiment, etc.) combined with climbing bond yields in Europe, falling bond yields domestically and seasonal trends, makes the market look very vulnerable in the near-term. In addition to that, earnings season is in session, which almost always means higher volatility.