Complacency divergence persists as investors try to pick bottom

I've been using the term "complacency divergence" to describe the discrepancy, also noted by others, between the S&P 500 and Dow Jones Industrial Average sinking lower, while the volatility index (VIX as well as VXO) hasn't been rising to a commensurate higher level. One reason might be that this "fear index" just rose "too high" back in November 2008. Perhaps. But I have been looking for the VIX to rally higher, whether or not to new highs (or at least to a higher retracement of the very high levels it would have reached back in 1987 according to reconstructed data).

One way to see a "snapshot" of the complacency divergence, is to look at a chart of the ratio between the S&P 500 and the VIX or VXO. Since I do like the VXO because it cannot be traded and therefore may be a more "pure" gauge, my chart (below) shows this ratio with the VXO. It's followed by my VIX chart. You can see on both that the volatility index looks anemic, compared with the actual volatility (price declines) in the markets today - not only on the daily charts since November, but also when you look at the monthly charts that I posted here earlier today:

One example of analyst articles is this, Market Will Bottom When VIX Finds a New Top at Seeking Alpha. Then, there's also a comment posted to that article stating, "Volatility has more to do with the rate of decline than the level the market is at so your theory that you can predict a market bottom by a new high in the VIX is seriously flawed..." It's an interesting point, yet the recent drop of the past couple of weeks has been relatively sharp without a similar sharp incline in VIX.

I'm thinking that the very fact that investors are trying to pick a bottom may have something to do with it. Another, more subtle fact may be the issuance of widely available trading vehicles - ETF's - that people can use to "buy" the VIX. Candidly I consider it a form of distribution (similar to my comments about the gold ETF's) that can be one signal that the VIX is making an important top, once it's finished putting in some level of a top. Don't worry - it isn't a strong opinion on my part ... just a thought.

At this point, I'm just looking to see VIX get to one of the levels marked on my chart such as 63.22 or 66.46. Not that it's the only method I'll be using to identify a market bottom of course, but that would be a nice clue.