Under normal circumstances, the VIX goes up when the market declines and goes down when the market rises.

Over the past week though, the VIX has been behaving rather oddly. On Friday June 6, the VIX jumped over 26 percent as the market took its nosedive. Then, this past Wednesday when the Dow dropped another 200 points, the VIX was only up four percent.

On Thursday, the Dow was up 57 points and the VIX was down 3.3 percent.

As you can see this is not a perfect inverse relationship between the VIX and the overall market. I know I am comparing it to the Dow rather than the S&P, but the differences in the percentage movements are not that great.

Personally, I think the problem stems from the options on the VIX. A few years ago, the CBOE started offering options on the VIX. To my knowledge, only the hardcore traders are trading the VIX options.

I can say that since the introduction of VIX options, the VIX itself has become a less reliable indicator for me. I always thought of the VIX as a good gauge of overall fear in the market. When puts were being bid up more than the calls, the fear level was increasing and the VIX was rising.

I didn’t always use the VIX the way other traders do or did. My best moves based on the VIX were ones where the VIX jumped sharply or dropped sharply over a ten-day period. Anytime I saw significant, sustained moves in the VIX, almost without exception, a move in the opposite direction was certain.

These days, my old indicator doesn’t seem to work as well, and quite frankly, I don’t watch the VIX as closely as I used to. The reasons behind that could be numerous, but I think it has a lot to do with the options.

First of all, the VIX is a derivative of a derivative. This might seem confusing, but follow along if you would. A derivative is simply anything that derives its value from another underlying instrument. The options on the S&P that are used to calculate the VIX are derivatives. Now the VIX derives its value from those options, making it a derivative of a derivative.

Now you have the options on the VIX, which are derivatives of a derivative of a derivative. Say what?

When the VIX was initially introduced back in January 1990, the idea was simple…measure volatility. The calculations may not have been all that simple, but the concept was. Now some 18 years later, the value of the VIX is being influenced by the options that are traded on it.

The point is that the VIX has lost of its meaning for me. I still look at it occasionally and it still makes some rounds in the media. But for all intensive purposes, it has lost most of its value.

That being said, the VIX is currently hovering right around its 100-day and 200-day moving averages. The 200-day has acted as support in the past and is now acting as resistance. This could have some merit, more because investors are focused on it.

Now it may seem odd that would base an investment decision on an indicator that I have just been dismissing, but I am looking for a rally in the coming week or so. Part of it is based on the 200-day moving average of the VIX acting as resistance and the index falling. But more importantly, with the big sell-off on the June 6, and the pullback on Wednesday, the S&P has moved into oversold territory on the daily chart.

Is this stereotype a thing of the past? I think it is.

Last summer, the volume on the New York Stock Exchange was higher in June, July, and August than it was in the three months prior or the three months after. The credit crisis was just coming to light and this spurred some of the additional activity, but not all of it.

With a huge percentage of trades being entered electronically these days, the brokers and floor traders are not needed as much as they were in the past.

The old adage on Wall Street that says you should “sell in May and go away” was based on the summer months being boring, but I don’t think you can do this anymore. Over the last few summers, there was plenty of movement and money to be made. Most of it was on the down side of the market, so if you don’t like playing the short side of the market it made it tough, but there is just as much opportunity to the downside as there is the upside.

Just like you change your wardrobe for the summer months, you might want to change your investment tools for the summer months as well. Don’t just pack away your trading like you do your winter clothes. Learn to play moves to the downside and use some different tools to make money.

Given the shift in sentiment over the last few months, I wouldn’t be surprised to see another bearish summer. The CBOE Equity Put/Call Ratio, and in particular its 21-day moving average are sitting at very low levels. The 21-day moving average is as low as it has been since the end of December, right before the S&P pulled back from 1,500 to 1,300 in just under a month.

From a technical perspective, I am torn when it comes to the outlook for the S&P. Looking at the weekly chart, we can see that the index is overbought and facing resistance from its 50-week moving average.

On the daily chart, the index is coming out of an oversold level and bouncing between its 50 and 200-day moving averages. The trend line connecting the highs from October and November is still in place, but there is some room for the index to bounce.