IF the Deja Vu Cycle CONTINUES to unfold, then the VIX faces potential for an extreme volatility move in 2013.
In the past, a move for VIX over the red trendline has resulted in a crisis. The red trendline was tested for VIX during the recent Fiscal Cliff turmoil in late December. Importantly, the VIX did not spike up during the October/November decline for SPX, but did spike on a smaller decline for SPX during the Fiscal Cliff event in December.
The VIX spiking on a smaller SPX move may be a warning of danger ahead.
The Deja Vu Cycle suggests the potential for a 460 point measured decline in SPX. As well, the potential exists for a large VIX move during the current economic environment. Several examples of issues:
1. Panic could result if people lose faith in the ability of the Fed to provide support to the market. VIX could rise dramatically in a declining market environment. The thought may be that if the Fed could not prevent the market from declining, then, is it even possible to stop a decline?
2. Panic could result if people lose faith in the ability of the Government to deal with the current debt crisis. The US is only 5 weeks from default by some estimates. If a solution is found in time to avert a default, concerns about high debt levels may persist anyway.
3. Recession in the US may be already underway since July 2012 according to ECRI. The market may not be pricing in the possibility of Recession at current levels.
Fear is a strange animal, and can snowball to irrational levels. VIX made a rare move during the first week of January 2013 that has not been seen since 1987. That is clear evidence of unusual market conditions, and therefore, violent movement is possible.
The Deja Vu Cycle for SPY with Measured Downside Target:
The Deja Vu Cycle from 2011:
The 5-year Cycle suggests SPX has been struggling at resistance. The 5-year Cycle indicates the potential for a larger than usual move ahead.
Support is shown much lower.
Below are some examples of Large Cap stocks that are not participating in the recent market rally.
Small Caps did rally, and can be a sign of a mature market. Financials did rally also, but have underperformed for several years, and are just slightly, finally, over 2010 levels.