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Time to buy stocks? Fear gauge breaches key level
Thu Oct 10,12:29 PM ET
By David Bailey
CHICAGO, Oct 10 (Reuters) - A key barometer of investor fear surged to a two-month high on Thursday as major U.S. stock indexes briefly hit multiyear lows, and some analysts said it indicated the stock market was too gloomy and due to rebound.
The Chicago Board Options Exchange's Market Volatility Index(^VIX - news), which basically measures how worried investors are, jumped to 50.48, the highest level since July 24 as stocks sank early. The fear gauge cooled later as U.S. stocks mounted an intraday rebound, with major indexes up 2 percent or more from Wednesday's close.
The VIX is a contrary indicator. A sharp rise in the VIX may suggest the market is overly pessimistic and stock prices could rise. Sharp declines in the VIX suggest an overly optimistic market susceptible to short-term setbacks.
The VIX has been in the 50 area only three times since the deadly Sept. 11, 2001 hijack attacks -- once in the days following the attacks, once in late July and again on Thursday. U.S. stock indexes rallied temporarily following the VIX's first two spikes higher.
"Historically, the current VIX levels of 50 or higher are associated with market bottoms as investors are willing to pay more for puts which carry the right to sell the underlying stock," said Tim Ord, editor of the Ord Oracle, a daily technical stock market publication. "This often occurs when the market is poised for turnaround."
The index has been trending higher because of mounting concerns about corporate profit warnings, fears of war with Iraq, and a string of corporate scandals.
The market may rally similar to the bounce from late July lows as recent declines have made it extremely oversold, said Greg Simmons, president of Linear Capital Management.
"If you don't buy them here in the ditch, where do you buy them," Simmons said. "It is just viciously oversold."
The Standard & Poor's 500 (^SPX - news) hit a low of 775.68 on July 24 and rallied to 965 within weeks. That rally faltered and the S&P 500 index broke the July 24 low early on Thursday.
The levels considered significant on the VIX vary, but in recent weeks it has ranged from 36 to 47. Readings above 30 or in the teens might have been considered extreme in the past.
"This level is high enough to produce a (stock market) rally," said Jay Shartsis, director of options trading at RF Lafferty & Co. "Today, some of the lows have been taken out, but (the market) has reversed back up. The market is vastly oversold and entitled to rally."
The VIX measures implied volatility of several Standard & Poor's OEX 100 option prices. Implied volatility expresses as a percentage how much the options market expects the index to move during the life of the option. (Additional reporting by Doris Frankel) |
