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To: BDR who wrote (196701)	10/10/2002 1:39:45 AM
From: BDR	Respond to of 436258

McMillan commentary on VIX, Friday 10/4: Stock Market The volatility of the broad market continues to increase. To wit, the record for consecutive triple-digit closing movements by the Dow was set during the last two weeks -- six days in a row. As a result, $VIX is quite high and this is causing all sorts of analysis -- much of it by people who had barely heard of $VIX a year ago. As might be expected, much of the analysis is erroneous in such a situation. Frankly, with actual volatility so high, $VIX is about where it should be -- slightly higher than actual volatility, thereby reflecting a "risk premium" for the traditionally volatile month of October (Figure 1). Therefore, we don't consider volatility to be making any particular statement about market direction right now -- despite the relative furor in the media over the high levels of $VIX. One particularly misleading fact has been stated in a number of places that when $VIX is over 40 that it is bullish. It might be, if actual volatility is at lower levels. But when actual volatility is very high, as it is now, $VIX has to be over 40 or it would actually be "underpriced." As is the case with most sentiment indicators, it is a mistake to use a fixed number to describe whether or not it's giving a signal. The only way that $VIX could give a buy signal now would be for it to spike to extremely high levels (probably into the 60's or 70's) and then spike back downward.