Volatility Indexes

On Wednesday the stock market decided to rally. The stock market does have the right to do whatever it wants, so a rally on a day like today seems reasonable. Given the volatility of the past couple of weeks, we think the participants are having trouble deciding what the market wants to do.

When we first called for a short term low in the market back in the middle of July, we were looking at the current time frame for getting out of our longs and back into some short positions. Our key focal points were the jobs’ report out this Friday and the Fed meeting on August 8th. The stock market has been holding under the early July highs even on a closing basis. This action suggests the next leg of the down move is near at hand. The Dow peaked last Friday near the 11,240 area and the NASDAQ Comp and NASDAQ 100 both peaked this past Monday before dropping strongly on Tuesday and closing the gap on Wednesday. The SP 500 did make a new high on Wednesday but it seems to be the lone index.

The market seems to have a ceiling on it at these levels. We will see if the market can break through it or not. We are heavily against that idea but we could be wrong.

Volatility Indexes: We have been watching the VXO and VIX, option volatility indexes, for some idea as to whether the market is ready to go down or not. The volatility indexes move up when the market goes down and they go down when the market goes up. What we try to do as bears is determine when the good times are to go short and when are the good/great times to go long. We will spend more time on these indexes as we see the market go down but, for now, we wanted to tell you what we think they are saying right now.

If you look at these volatility indexes on a daily basis you will see them move up strongly on unexpected down moves in the stock market. If you look at them on a chart you will see a nice negative correlation against the stock market. What we have seen very recently is that they collapse much faster than they go up. This indicates that the participants have no thought (fear) that the markets could actually go down on a sustained basis. These indexes should be reflecting at least some fear in the market place by increases that stick. In reality, as the markets rally out of down situations, these indexes just collapse, suggesting a lot of complacency on the part of the participants.

If you are looking for a fairly decent indicator of buy recommendations, these volatility indexes have had good track records. As these indexes climb up toward 50 or 100 we will be looking at covering our shorts and going long. Yes, we would be looking at other indicators as well but for a pure fear index, the volatility indexes are great. We will be discussing these in more detail as the market goes down.

Dow Industrials: 11,199.93 +74.20
QQQQ: 36.89
RYVNX: 23.74
RYAIX: 25.18
RYCWX: 42.71
TLT: 85.78
BEGBX: 13.59