Volatility Index Pointing To Market Reversal

The VIX Index (NYSEARCA:VXX) is now at a five-year low. At the same time, the Standard & Poor’s 500 index (NYSEARCA:SPY) has reached a four-year high. As the chart below shows, there should be concerns about a reversal, if not expectations.

That being stated, this is a liquidity driven market. The economic news emanating from around the globe has been dismal. Economic growth in the United States is down while unemployment is rising. Europe is in a recession. Japan is well into the 21st year of “The Lost Decade.” For China, India and other emerging market nations, the economies are still expanding, but clearly losing steam.

On a price-to-earnings basis, the financial markets are not overbought. At present, the average price-to-earnings ratio for a member of the Standard & Poor’s 500 Index is around 14. What is concerning however the double digit rally is over the last two months for no discernible factor. Apple (NASDAQ: AAPL) is at a year high due to the September 12 introduction of the iPhone 5, but that should offer scant relief for bulls.

Markets are trading at a four-year high with gloomy economic news from around the world. For the technical indicators, the rally has also taken place with declining volumes. That is very bearish. Confirming this is the high-low index for the Standard & Poor’s 500 Index. It has soared to 98.96 as over Friday’s close.

Traders should look for a reversal, particularly with Federal Reserve Chairman Ben Bernake speaking on August 29 at Jackson Hole.