Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Dealer who wrote (42296)	9/20/2001 6:25:00 PM
From: Sully-	Read Replies (3) \| Respond to of 65232

The VIX trick Volatility indicators for the stock market are puzzling. Gauges such as the VIX, VXN and QQV, which are based on the number of "put" options contracts folks are buying vs. their counterparts, "call" contracts, are soaring. Normally, soaring volatility is a worrisome, but ultimately positive sign in the perverse way that Wall Street perceives investor sentiment. Puts are bets the indexes will fall, and calls are bets they'll rise. The so-called VIX, the CBOE Market Volatility Index, has gone to 48 from 35 before the Sept. 11 terrorist attacks. This may indicate that investors, greatly stepping up the put contracts they are buying as insurance against the falling stock market, have thrown in the towel. Such disgust with the market could be foreshadowing that the major indexes are ready to turn higher. Not so fast. "The fact the VIX (VIX: news, chart, profile) is now trading at levels that have previously been market bottoms is good; however there are a few differences," says Chris Johnson, whose work as a senior quantitative analyst at Schaeffer's Investment Research has correctly forecast many of the stock market's down, and up, moves this year. Johnson says in the October 1998 and October 1997 sell-offs, when the VIX struck 45, the Standard & Poor's 500 Index was trading above most major long-term moving averages. Such a pattern indicated at the time that the S&P 500, the benchmark U.S. stock market index, had "a great deal of support." For instance, the October 1998 damage to the S&P 500 Index, in the wake of the Long Term Capital Management fiasco, "was contained by its 21-month moving average," he points out. This week, the market "is trading well into bear market territory, so we should expect to see some investor fear priced into the market, which is not the case in a bull market," Johnson said from Cincinnati. "This means that we would expect to see higher levels of the VIX achieved before the market puts in a credible bottom." How high? Johnson and other quantitative analysts aren't exactly sure. But don't be surprised to see the VIX, which is shown here on a chart, to go as high as 60.6, its October 1998 intra-day high, before bargain-hunters return. "The 21-day moving average of the CBOE Equity Put/Call ratio is currently in a strong uptrend," Johnson says about the number of investors betting through the use of options contracts on a further market fall. "The fact that this trendline looks like it will continue to rise forces me to expect higher VIX levels." cbs.marketwatch.com.