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Strategies & Market Trends : The Stock Market Bubble -- Ignore unavailable to you. Want to Upgrade?

To: Moominoid who wrote (1933)	10/3/1998 11:09:00 AM
From: Barbara Barry	Read Replies (2) \| Respond to of 3339

David, FWIW..A view from Barron's The question arises as to whether the market is now in a condition similar to that of November 1929 and ready for a substantial rally -- even if the world is coming to an end later. Larry McMillan, editor of the Option Strategist, presents several indicators which suggest that the path of least resistance for stocks is now upward. First he notes that the VIX, the Chicago Board Options Exchange volatility index, reached very high levels, peaking on August 31 before recently receding. That reflected puts on the S&P 100 being bid way up as fear gripped traders. High fear equals market bottom. Of special interest is the fact that the VIX stayed high for a few weeks, not just a one- or two-day spike, and this might be extra bullish. McMillan next points to the important equity put/call ratio, which soared to levels of put trading not seen since the 1987 collapse. Intriguingly, he thinks that back in the 1980s this ratio might have been inflated by reversal and conversion arbitrage, "a strategy which is no longer prevalent." He concludes: "Today's readings at 60% might be the highest purely speculative readings in history, although there's no way of confirming that." Another example of traders turning "too bearish" is found in the very high levels of put trading for S&P 500 futures options. Place this in the bullish column too, says McMillan. To take advantage of the elevated VIX, Tom Gentile, chief options strategist for Optionetics in San Mateo, California, suggests selling credit spreads which "offer good risk/rewards as option premiums tend to revert to their averages." Mike Oyster of Schaeffer's Investment Research feels that "anyone who dumps their long-term stock positions now will end up kicking themselves in six to 12 months after stocks have recovered and moved into new-high territory." This he concludes because option indicators "are illustrating runaway fear" which will ultimately show that "current levels represent a historic buying opportunity." Specifically, Oyster cites the 10-day moving average of the CBOE equity put/call ratio, which reached the extraordinarily high level of .72 on September 3 and .71 on September 10. "These are by far the highest readings of the 1990s," he says. Mike allows that a certain amount of pessimism can be expected as the market pulls back but that the "extremely extreme" readings recorded of late suggest that "stocks are a great buy even though there is a slight risk of further downside moves in the short term." I don't want to push the 1929 scenario too far. Still, comparisons may prove useful. After the October Crash in 1929, a month long rally ensued, much like the one we just witnessed in September. Then a successful test of the lows took place before the rally resumed. If history is repeating, the scary market plunge last week should prove to be the good buying spot implied by the option indicators herein. Regards, Barbara