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Strategies & Market Trends : Trend Setters and Range Riders
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To: wgh613 who wrote (5303)5/22/2001 8:00:46 PM
From: Susan G   of 5732
 
Looking at the Low Reading in the Volatility Index
By Helene Meisler
Special to TheStreet.com
Originally posted at 9:18 AM ET 5/21/01 on RealMoney.com

Some of you may have noticed the Volatility Index, or VIX, has been trending toward the lower end of its range lately. It is now in the 24 area, down from a high in the low 40s in late March.

I find the VIX to be more effective when it reaches an extreme on the upside, rather than on the downside. High readings tend to be one- or two-day events, while low readings tend to be more gradual. This is consistent with most market sentiment indicators: It is usually much easier to pick a bottom than a top. Why? I believe it's human nature to want to buy instead of sell.

With regard to the current low reading in the VIX, we've just moved into this range. Back in late August and early September, we traded in the lower end of the range for several weeks before the market fell apart. The same is true for the lower readings that we found in the January-February time frame.

Sure, the VIX at a low reading bothers me. But I read it the same way I would read the Investors Intelligence bullish and bearish numbers: We've moved from 43.9% bulls to 50% bulls, but 50% is not an extreme reading. Sentiment is moving in the bullish direction, but it is not at an extreme.

The VIX needs to do more work down in this area before it shows extreme bullishness -- or too much complacency about the market.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.

thestreet.com
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