"WHENEVER THE VIX IS BELOW 20, BUY INDEX PUTS: The VIX briefly touched 19.96 on Monday,
its lowest level since July 21, 1998, the day following the summer market top. One of the best strategies
historically, and in 1998 even more so, has been to buy puts on the overall stock market whenever the
VIX is below 20. The reason is that the low volatility indicates that investors are more concerned about
missing out on a rally than they are about losing money in the market, an unusual level of overoptimism
that coincides with market peaks. As additional confirmation, the bullish sentiment among investors in a
series of recent polls is at extremely high levels, in fact far exceeding the bullishness in July of this year.
Having seen what they believe is a real bear market, investors are convinced that any bear market will be
followed by a new bull market that takes stocks to new all-time highs. Of course, those who have money
in mutual funds who actually track their holdings know that the Russell 2000 is still below where it was a
year ago, and substantially lower than its all-time high in April, but no one want to listen to sobriety
when the party is kicking into high gear. Monday's equity put-call ratio of 0.32 is another sign of
danger, indicating that investors are buying more than three times as many calls as puts on their favorite
stocks; the usual ratio is 2.5:1. The VIX closed at 20.74 on Monday, so be patient; check with your
broker before placing your order to make sure that the VIX is actually below 20, ensuring that you
capture the maximum euphoria at a minimum price. "
goldminingoutlook.com |
