Hi Jon, Bernie Schaeffer has some reasonable points.
I've lived through and traded periods over the last 5 or 6 years where the VIX was in the low 20's and at times, I've pointed to it, and said "aaahh, a market top is here. I've found thought that when we've not had confirmation with several other indicators that we can work down to the 17-18 level.
I learned that the hard way, a couple of times before.
In the spring of 1998, there were some signs of a top and the VIX was down at 20, but the market came out of a late May low and had a rally in June and into July 17th-20th.
I know I specifically waited in the summer of 2000, for the VIX to get down to the 17-18 level at the end of August before giving a "strongly opinionated sell signal.
Message 14290707
We continue to see bullish action in the SPX, The DJIA, the DJTA, and especially the BKX index.
stockcharts.com[h,a]daclyyay[pb50!b200][vc60][iUb14!La12,26,9]&pref=G
I've talked about the leadership strength of the BKX several times over the past 3 weeks.
siliconinvestor.com
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Bernie Schaeffer: Range-Bound S&P 100 Index (OEX) Affects the CBOE Market Volatility Index (VIX)
By Bernie Schaeffer
3/15/2002 9:59 AM ET
Followers of the options business know that the CBOE Market Volatility Index (VIX - 21.81) is used to track expectations of future volatility on S&P 100 Index (OEX - 587.08) options. Readers of our commentaries on SchaffersResearch.com know that this indicator is frequently used to gauge investor fear in the marketplace.
The "fear index's" 10-day moving average is currently perched around the 23 mark. This is an 18-month low for the short-term trendline, as you have to look as far back as late-summer 2000 for the last time the moving average crossed into this area. These troughs are represented by red arrows in the chart below.
Other recent bottoms in this moving average are illustrated by dotted green arrows. The bottoms are defined as such: 24.50 in mid-February 2001, just above 23 in early July 2001, and around 24 in late August 2001. These short-term lows in the VIX's moving-average trendline preceded declines in the OEX, as depicted in the chart. Once again, the contrarian theorem is proven; when investors are showing complacency and a lack of fear, it can be a bearish sign for stocks. Only when trepidation floods the marketplace can equities benefit from scaling a "wall of worry."
This entire investor sentiment discussion aside, the VIX does have some reason for pointing toward reduced volatility in the OEX. The broad-market index has been sandwiched in a range between the 540 and 600 levels for about 5-1/2 months. From October 4 through this morning, 100 percent of the index's closes have been contained between these levels. This represents a 5.25-percent range surrounding the mean level of 570. Spanning this out on an annual scale, it is equivalent to a 7.75-percent trading range above and below the mean.
My major concern is this: is it rational to be projecting a period of low volatility into the future? We are at war and we are living in an extremely uncertain post-9/11 world. We've had numerous high profile bankruptcies, and no one knows what the next rock to be turned over will reveal. We've had accounting scandals and accounting issues with some of our biggest corporations. Argentina has imploded; Japan may be next. There is every indication that the telecom depression will be with us for a long time to come. There is absolutely no guarantee that the economic recovery we seem to be experiencing will be anything but a weak one. And there's no guarantee that even a better-than-expected recovery will have a material positive impact on corporate earnings due to excess capacity and lack of pricing power.
Do these very real risks and concerns rule out the possibility of the highly positive scenarios that are built into current stock prices and built into the current low VIX levels? No! But the above discussion of the negative implications of a low VIX 10-day moving average supports the general theory that when investors become "over the top" complacent and confident there is usually trouble around the corner. As Peter Bernstein says in his book Against the Gods: the Remarkable Story of Risk: "Wars, depressions, stock-market booms and crashes and ethnic massacres come and go, but they always seem to arrive as surprises."
- Bernie Schaeffer |
