I am getting the impression that there is a shift in trading dynamic coming for this market rally. The current rally started in March 2009 and is currently on going. The Vix/SP500 overlay has been an indicator of mine through out the years, and have posted about it quite a bit.
If we were to look at the market from this fairly predictable overlay, protection is merited, as the VIX is approaching the lower end horizontal line.
But the biggest challenge about observing patterns is to understand when these patterns are about to change. When other market factors are incorporated into the mix, I get a different impression. I get the sense of a new VIX trading dynamic developing, and a new phase of this bull market. (Perhaps the new VIX range maybe around 11ish-20ish.)
The some factors include:
1. The re-assessment of macro economic conditions.
2. The 10 year yield rising. Keep in mind, this rise has economic implications which would suggest stronger GDP, increased job growth, etc. (The fundamental thesis is solidified with the start of an expansion in credit as seen from the Nov and Dec, and interviews/conference calls by major players.)
3. Valuations are by no means over extended. At best, they are reverting to normal levels.
On the very short-term, I am still just chillin w/respect to my positions. The market is overbought, and a consolidation maybe in the cards. But its technical set up like these, along with supporting economic fundamentals, that trigger a change in trading dynamic.