Thursday, January 14, 2010

Confidence in the VIX

In my September 16, 2009 post, "The Last Great Exit?", I made the case for a possible market top in the DJIA at 10500. Yesterday, the market closed at 10689 climbing from a month long sideways pattern. The market technicians are hyped up over the drop in the VIX (CBOE Volatility Index).

LONDON (Dow Jones)-- "Stock market volatility has been falling across the globe as fears of economic Armageddon have melted away, suggesting greater stability and potentially higher stock prices ahead. 'The steady decline in the volatility indices in equity markets reflects increasing investor confidence that the worst is behind us and that the rally continuing is a more likely scenario than a correction,' said Stephen Lindsay, a derivatives broker at London broking firm JB Drax. The Vix index, which measures volatility in Standard & Poor's 500 index options and thus, in effect, the broader U.S. stock market, has plummeted from 80.86 points, a high hit in November 2008, to 18.25 after falling steadily since the March 2009 rebound in world stock markets. Its European counterpart, the VStoxx, which measures volatility in Euro Stoxx 50 options, has fallen from a high of 85.5 points to 22.6. The Vix, sometimes dubbed the 'fear index', 'is a measure of risk applied to U.S. equity in the near future' and "reflects market expectations of future volatility,' said Tom Saywell, a derivatives specialist at HSBC Investment Bank. 'The recent new lows indicate the high relative levels of comfort held by the market in the near future and rising confidence that shocks on an economic and corporate basis may be a thing of the past," he added.
But despite the recent falls in the Vix, it's still historically high. 'It spent a large period between 2003 and 2008 in the low teens,' noted one derivatives broker at an independent London firm, who added: 'the status quo of low rates and continued fiscal support, coupled with the perception of economic recovery, has compressed volatility.'"

I still think that it's time for a decent correction. The sheeple's confidence historically has been on the "wrong side". Stay tuned.

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