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Politics : High Tolerance Plasticity

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To: energyplay who wrote (17011)	10/7/2002 4:29:38 AM
From: jim_p	Read Replies (1) of 23153

05 October 2002 Hello Fellow Chart Watchers! With the markets continuing to give clear, extremely bearish technical signals (see my Public Chart List for the major new P&F signal that happened Friday), many people are starting to grasp at anything that may signal the bottom is near. Many market indicators are starting to fall into that category. Raymond James analyst Ralph Bloch was quoted on CNN Friday as saying that if the current high level of the Put/Call Ratio "continued for four or five days, I would get so bullish I would be hysterical." Internet message boards are humming with talk about how the current high readings of the Volatility Index ($VIX) almost guarantee a rally. Oh really? Let's look at the history of these two popular market indicators during the market's recent rise and fall. As the annotations suggest, it is not at all clear that these two market indicators provide clear, timely indications for longer-term investors. They both "over-reacted" in 1998 and "under-reacted" in 2000. Personally, I think these charts reveal how the VIX and Put/Call Ratio are fundamentally short term in nature since their signals were only valid for relatively short timeframes. So now that both of these popular market indicators are close to record territory what should we conclude? It's important to remember that there are two scenarios under which high VIX readings occur: 1.) After a sharp market sell off, and 2.) During an extended market decline. In the first case, it is reasonable to expect a quick recovery rally - thus the common perception that high VIX readings are bullish. I'm not convinced that the second scenario has similar bullish implications however, at least not in the near term. We could very easily see high VIX readings for the next several months as the bear market continues. Unfortunately, the VIX was introduced in 1993 and so we're unable to compare its current readings with readings from prior market bottoms. The bottom line is that it would be a mistake to jump back in right now based solely on these readings. I'll be watching these charts with great interest in the coming weeks and months however and suggest that you do the same. Take care, Chip

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