VIX Cycle: “Shock-Reversal-1-2-3-4” Repeat

26 nov 2020

“Shock-Reversal-1-2-3-4” is a model or cycle that occurred on VIX a few times since 2018. What is important is to recognize in which stage of that cycle the VIX is currently positioned. We see fear dropping as stocks are recovering since March as investors are less concerned about the potential risk-off because of QE and vaccine solution to coronavirus. But we know that markets are moving from pessimism to optimism due to different global events which are the main reasons for change in investors mood. Now we see optimism increasing, which is the first but important evidence for next important upcoming cycle. When reading the current model of VIX cycle then we shall be aware that there can be slightly more upside left on stocks, but then maybe in 2021, cycle may change with a jump in fear especially if VIX goes even lower. We think that “shock” is the next leg, and that increase in volatility may cause a new turn on stocks. However, this may not be the case just yet, maybe sometime in 2021, but we think that even if stocks will continue straight to the upside it’s much safer to join the ride after higher degree retracement.