FWIW - VIX discussion
Found this on the epoch.com web site....
The good kind of stock market crash
by Don Luskin
Last week we focused on the Dow Jones Industrial Average's breakout from its yearlong steep declining pattern -- and we hoped the NASDAQ and the Epoch Technology Index could follow suit. It's hard to think of the Dow as a pacesetter for tech stocks, but that's the crazy kind of market we've got.
Unfortunately, only one sector of the Epoch Index has kept up with the dynamic Dow -- the Epoch Software Index. The other sector indices remain confined below long-term resistance.
Why is this so? The answer lies in another stock market crash that occurred last week, a good kind of crash. It wasn't a crash in prices as in April and May. It was a crash in volatility. And that's a good crash.
Volatility is a statistical measurement of how much a stock or an index fluctuates over time. When volatility is high, stock prices fluctuate wildly, absurdly, and seemingly at random. You have a madhouse on your hands, as we did in March, April and May.
Look at this chart and you'll see how volatility peaked then. At those levels the market was more volatile than at any time in history other than in the depths of the Great Depression in the 1930s.
Why? Investor uncertainty, of course. But the reasons for uncertainty are exactly the opposite of those that prevailed in the 1930s. Then the market was volatile because investors couldn't decide exactly how bad the future was going to be -- was it going to be catastrophic, or just merely horrible? But in this time of explosive technological innovation and wealth creation, investors can't decide how good the future is going to be -- is it going to be absolutely fabulous, or just merely wonderful?
Of course, when times are good investor uncertainty has another source: the risk that the government will halt the gravy train. It can happen so many different ways: monetary policy, tax policy, trade policy, antitrust policy, regulations, you name it.
But over the last two weeks the NASDAQ has been as calm a lake on a windless day, and so volatility has collapsed to the lowest levels of the year.
Why? Because for the first time this year investors know exactly what the Federal Reserve is going to do about interest rates: nothing. The colossal uncertainty that comes from not knowing how America's money czars are going to manipulate the economy this month has been removed from the equation. Isn't it wonderful?
So the market can finally heal from the pathological orgy of volatility it experienced in the spring. And gradually investor confidence can return.
It will take a while for the NASDAQ and the Epoch Indices to achieve their breakout. It will have to happen in slow motion. But just remember, it's not really slow motion -- it just seems that way after what we've been through this spring. So be patient. This is normal. This is good. |
