I am back from a long leave and have not got enough time to research on a particular subject. However, I have made a quick study on the India VIX and the correlation with the market and hence presenting it in a short post.
First, please go back to my articles in first week of February when I was bearish on the market and had maintained that it was a sell on rally market. In fact some of you will remember that I became bearish in January first week itself. In those articles I had mentioned about the volatility and its correlation with the bottoming out process. Here’s the link towards one of those articles.
It’s not a coincidence that the VIX hit 29 point something on the 25th February and the Nifty made an intermediate bottom of 5232 on the same day. It had to happen, markets bottom out when the fear is highest, when everyone starts turning bearish and that’s what happened one trading day ahead of budget, which was the date in question, 25th February.
Now, this phase is looking uncannily similar to the Feb-Apr 2010 experience. In Feb 2010, the Nifty bottomed at a VIX level of 30 and while the VIX fell from 30 to 18, the Nifty rallied 10% by the end of first fortnight of April. A note of caution though, the Nifty had a double dip, when it again fell 8% in April-May period and finally bottomed out with VIX hitting 35 in May.
So while it looks like an intermediate bottom is in place and the markets can eke out a further 5-6% rally, just keep a hawk eye on the India VIX. If it starts to make a move below 20 accompanied by a rise in speculative F&O volumes, it could be signal of an impending double digit. Till then, the markets look fine. Remember, you need to be ahead of the markets and not behind it to make big money and market internals would almost always give you the right signals.
Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation