Stock Market Top Is In

There is an accurate way to quantify the collective level of fear (or lack of fear, for that matter) among market participants: it's called the CBOE Volatility Index (VIX). A rising VIX indicates increasing pessimism; a falling VIX signals mounting optimism.

The VIX reading was one of the indicators that led EWI analysts to publish a bullish outlook for stocks in the period from March-June of 2009, in our Elliott Wave Financial Forecast publications. In March, with U.S. stocks circling the drain of a 12-year abyss, we anticipated a powerful rally that would bring the Dow Industrials to the 10,000 level at minimum, with an accompanying surge in positive sentiment readings.



Just as a historically high VIX reading in late 2008-early 2009 signaled a fully saturated pessimism and therefore an approaching bottom in stocks -- a steeply falling VIX reading now exposes a near absence of fear.

In time, the Elliott wave structure, momentum indicators, and Fibonacci time cycles joined the VIX to tip the scales in favor of a downturn. Here, the January 13 Short Term Update stepped up to the plate with this commanding insight:

"The larger and stronger the trend, the better the signal... With respect to the VIX, [the current 16.86 reading is commensurate with] a peak. The odds increase that a "VIX" sell now will lead to a decline that is more than just a few percentage points. This means a trend reversal is fast approaching.