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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: HairBall who wrote (19825)

7/10/1999 12:34:00 PM

From: Giordano Bruno

Respond to of 99985

LG, Barron's Summer of VIX

Options index hits a low and alarms sound

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By Michael Santoli

A tropical swelter chokes a North American financial capital. The major stock-market indexes are flickering around all-time highs, sent aloft by an invincible U.S. economy and giddy expectations for heroic corporate earnings. The 30-year Treasury yield is hovering near 6%. Reflecting this carefree, day-at-the-beach mix of good cheer, the principal measure of fright in the options market -- the Chicago Board Options Exchange's Volatility Index -- lolls below the key 20 level.

Welcome to July 1998.

Toggle forward by one year to this past week, and you'll find the only significant difference in the scenario is that New York, and not Chicago, is the city that's been buckling under a nasty heat wave. And herein lies the warning, one that a number of market watchers were sounding amid the surface calm of last week: The market hit a peak July 17 of last year that it didn't revisit for four months, and only after sustaining a vicious descent of near-crash proportions.

The VIX, a measure of prices on Standard & Poor's 100 options and an indicator of the demand for downside protection, has been steadily falling from around 30 in late May and last week danced into the 19 range, having hit a recent low of 18.85 July 2. That retreat, combined with consistently heavy speculation in equity call options, has been enough to trip the complacency alarms for observers fond of contrary indicators.

Now, the meaning of the VIX is subject to myriad interpretations, just as entrails represent a forecast to some, a meal to others and simply an ugly mess to the rest of us. One factor, cited here recently, may be that the nearest-term index options, which are used to calculate the VIX, have been shunned by fund managers -- tired of watching their insurance evaporate worthless -- in favor of more distant contracts, whose prices have held up better.

There is also a school of thought that contends the absolute level of the VIX is less important than its trend, rising or falling. This school teaches that a descending VIX means the muscle cramps of fear are being massaged out of the market, improving its performance through rising stock prices. Only when the VIX bottoms and stalls -- and a chart reader might soon be able to make that case -- does it signal a bearish complacency.

Yet another camp will tell you that the VIX at these low levels may not be able to predict market direction, but signals the calm before a storm, meaning the market is poised for an explosive move in some direction. That would mean that strategies that profit from any kind of volatility, like buying a call and put at the same strike on the same stock, are well-advised.

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To: HairBall who wrote (19825)	7/10/1999 1:13:00 PM
From: Casaubon	Read Replies (1) \| Respond to of 99985

LG, You wrote: Well for a intraday scalp, what the heck go with your own short term TA. I am expecting the TYX to continue back into the rising wedge. With an eventual break of the formation to the norm. Now, the TYX is plotted in terms of rising interest rates (the bond selling off) at the MDA site. And you said, you expect a "break to the norm". For a rising wedge in, in a declining trend (the yield on bonds, in this case), one would expect yields to break to the downside for the wedge to "break to the norm", as you said. Is this your expectation. If so, this is counter-intuitive to rising inflation. Do you have any comments to make, with respect to your statement, my interpretation of your statement, and the prospect of inflationary pressures causing the bond yield to rise. PS Two stocks I've owned and bailed on because of FEAR CHKP @ 32 in early may (price objective 57) ARX @ 14 in early may (PO now identified as 32) learning has been very frustrating, because I'm not making money. But, I am getting better at reading charts and recognizing sound fundamentals with good growth potential. Eventually, fear will be replaced with confidence. Thanks for everyones input.