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Strategies & Market Trends : Zeev's Turnips - No Politics -- Ignore unavailable to you. Want to Upgrade?

To: LTK007 who wrote (69294)	5/20/2002 7:43:15 AM
From: orkrious	Read Replies (1) \| Respond to of 99280

From Keith Keenan, RMpro Market VIXation 05/20/02 07:16 AM EDT Option volatilities have plunged recently and, at least in the case of the VIX, from a relatively small peak, suggesting that S&P 100 (OEX) option players are anticipating rather dull trading going forward. While they may in fact have their wish granted in the short term, a look back at sharp weekly drops in VIX values paints a decidedly more volatile scenario. While it's true that that last time the VIX sank as much on a percentage basis as it did this past week (18.9%) it led to a big rally, there was one important difference. The time was last fall, post-Sept. 11, and the VIX gave back 23% from a weekly closing peak of 48.60, a level almost double last week's closing top at 25.03, reflecting a degree of fear and panic nowhere to be found currently. On the other hand, the two most recent instances of the VIX falling sharply from a relatively low peak, similar to last week's 25.03, have preceded prolonged dramatic selloffs that have in both cases resulted in selling climaxes that raised the VIX to above 40 on a weekly closing basis. Most recently, in early June 2001, the VIX fell just over 13% weekly from 25.79 to 22.38, after which the markets sold off for the next 14 weeks, where the OEX fell by 23% and the VIX peaked at 49.04. Similarly, in the final week of July 2000 the VIX shed 12%, falling from 24.30 to 21.54. And while the OEX did manage to advance by 1% or so the next four weeks, what happened thereafter was decimating to the bulls: Over the next 31 weeks the markets plunged with the OEX free-falling 42% and the VIX topping at 40.70. Granted, this is a small study on just one indicator gauging merely a single index. Still, given the present level of option crowd complacency so soon after the sharp rally of the past week and a half, paired with key averages S&P 500 and Nasdaq Composite still below their 200-day moving averages and the two aforementioned like cases occurring in months now approaching, it cannot be dismissed. While the markets may very well extend their current run higher for another week or two, last week's action in the VIX suggests limited upside potential.