Pay More Attention to the Price Action in 2023

There are a host of indicators out there that don't seem to be portraying what we should be seeing in stock market prices.  Take the VIX, or the volatility index for one.  This indicator simply measures the demand for puts and calls on the market (spx 500).  It rises when the demand for puts increases, and comes down when call options are desired.  But recently we have not seen the VIX 'doing its thing' when the market moves in a big way, up or down.  Some have even said this indicator is 'broken'.  I can only chuckle when I hear that.

 

It seems when an indicator is not doing what it is intended to do, or give the most accurate information based on what we know, it frustrates everyone who wants to use the tool.  With the VIX, we've seen small bumps higher when the market gets slammed, while only small moves downward when the market goes higher.  For the month of December, the VIX was up 5%, not a small amount.  

 

But the SPX 500 was DOWN 6.15% in December, one of several large down monthly moves in 2022.  As we examine other down months for the SPX 500 this past year, we would have seen a large jump in volatility, the VIX climbing sharply for instance in August (about 20%) as the SPX 500 plunged 5% or so after being much higher mid-month.   So, what gives here?  Two similar returns, very different volatility readings.  Should we not care about the VIX at this point? 

 

There are a myriad of explanations for the very odd behavior of VIX, some valid while others are not, but there is no mistaking the poor price action.  That is clearly evident. Price always pays. 

 

We should certainly care about the VIX and the message it sends us each day.  But rather than placing all of your faith behind this one indicator, try paying more attention the price action, where the indication of what is happening will not be lost on you.  In fact, the price action is the king of all indicators, and as a long-time technician I use it every single time when evaluating a chart.  

 

It is vital to follow price and not only the secondary indicators, because there will be times the price action is not in sync, and thus may lead you down the wrong path.