VIX signals trouble ahead for S&P

There are signs that the S&P’s bull market is “truly mature”, according to Riccardo Ronco, Head of Technical Analysis at Aviate Global in London.

Specifically, Ronco points out that new highs in the S&P 500 have been unaccompanied by new lows in the VIX, a ‘divergence’ (from the normal inverse relationship) that has been forming since December last year (see chart 1).

Ronco believes such divergences between the VIX and the S&P 500 can be a useful tool for spotting trouble. A weekly chart shows the same pattern occurring on a larger scale in 2007 (see chart 2), prior to the credit crunch.

For the moment Ronco recommends continuing to follow the trend – “it is bullish after all”  – but as a first step he suggests “trimming positions that are not working or that are lagging the index.”