Jon C. Ogg
September 18, 2008

This level has triggered or coincided with enough market ralliesdespite what the news is that when traders see that 30.00 or higherthey start hitting the BUY buttons.  Sometimes they are early andsometimes it still gets worse, but that is the level traders look for.The VIX went as high as 30.96 after the open.  The S&P 500 Indexwas down over 40 points at one time and the intra-day low is$1,212.69.  The S&P is now at 1,228.75 after almost 90 minutes oftrading.

Again, these levels are technical and can often be short-term ineffect.  They rarely are the actual "all clear" bell for verylong-term.  But even a bear market rally can be a sharp one.

Jon C. Ogg
September 15, 2008

DJIA           13,820.84; +54.14 (+0.39%)
S&P500    1,525.56; +6.81 (+0.45%)
NASDAQ   2,671.22; +16.93 (+0.64%)
10YR-Bond  4.632% (-0.04)

The CBOE VOLATILITY INDEX, or the famed "VIX" has given back all of the "Fear" out of it being referred to as "The Fear Index."  Back in August this crossed 30 for the first time in what felt like ages, and now this is finally back under 20.00.

When the market was humming along in early summer it was trading under 13.0, which is quite low historically.  As far as how this works, it is pretty simple: As the nominal value of the index rises it reflects broad selling and broad fear; and when it starts reaching extreme levels it gets used to measure extremely oversold conditions.

As the index gets very low at say under 15.00 (in recent times anyway), it shows that goldilocks lives and no one is worried.  In essence this measures the cost of limiting downside in put options.  Here is a more formal explanation: The VIX is a weighted blend of prices for a range of S&P 500 index options that measures the market prices for all out-of-the-money puts and calls for the front month and second month option expirations.

• Previously we noted that when the VIX crossed 30 that it was making an omen or being closer to an extreme;
• Here is a sample of when it started getting juicy again over 20;
• Here we noted in February how no one was scared and no one wanted protection.

The VIX is now at 18.70 (unoffical close), down 1.75 and that will be the first sub-20 close since July 25, 2007.  Here is a BigCharts.com chart:

Jon C. Ogg
September 21, 2007

The CBOE VOLATILITY INDEX, or the beloved "VIX," has crossed back above the 30 threshold now. This is the near-term high for that index.  The DJIA didn’t just close under 13,000, it closed under 12,900.  It would be easy to put on a bargain hunter’s hat and try to say this is a great buying opportunity, but trying to fight the tape is something that has be done by those with unlimited resources or by those that don’t need to worry about short-term fluctautions.

As far as the year is concerned, the DJIA is still up but barely.  The DJIA closed at the of DEC-2006 at 12,621.69 and we closed at 12,861.47 today.

Today’s weak market close puts us at a recent high on the VIX that hasn’t been seen March 2003 when the VIX got as high as 33.61 after seeing highs north of 34 in the months before that.  In July and August of 2002 the VIX traded up in the 40′s, the same as after September 11.

As we get to extreme readings in a call and orderly day, why is it that it is easy to get the feeling that we are going to have to get a major shakeout day before the selling climax feels closer?  A 400-point drop is historically just a run of the mill bad down day on a percentage basis, so we’d be considering something far worse if this feeling is true.  Hopefully it won’t come to that.

Here were some winning DJIA components just last week when the market was as bad as today.  We also discussed defensive stocks for a crummy market, and those are the sort of stocks investors usually flock to when they want to go for a safety net but still be exposed to the stock market.

Jon C. Ogg
August 15, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

We’ll use lay terms here only, so you can go to Investopedia for a full explanation summary if you choose.  As the VIX rises it represents a higher premium that investors are willing to pay for protection.  As the VIX falls it means that Main Street is not too worried about Wall Street and the public is less concerned about a market drop.  When you get extreme readings, that is usually used by technical traders to mark either a bottom or at least a level for an entry point.  The definition of "extreme" will vary wildly and everyone has to decide what their version of extreme is.

The quasi norm of late has been a very low VIX reading.  It even went well under 13 and challenged a 10 reading for much of early Q1-2007, meaning on a collective basis no one was all that concerned about a market drop.  In February the market experienced a mini-meltdown, and at one point the VIX challenged the 20 level with a high reading of 19.01 in February and high of 21.25 in March.  The highs in the May 2006 to July 2006 a year ago had the VIX at highs of 19 to 23.28 before the markets went into rally-mode.  Go back to early 2003 and 2002 and the VIX was steadily trading in the 30′s and the 40′s when the recession was peaking there were still concerns galore.  At the peak of the September 2001 selling the VIX reached as high as 43.74.

We noted the VIX when it was under 10.0 briefly and even noted an investor’s Nirvana existing before the last mini-meltdown.  Guess where the VIX is today.  The current reading has just crossed over the 21.0 handle, and was as high as 19.46 yesterday and 19.09 on Tuesday.  These are not historically any major numbers, but in what was feeling like a new low-VIX world this is at least getting close to what would seem to be an extreme reading.  Does that mean the VIX can’t continue climbing and that the stock market can’t see added selling?  Absolutely not.  Can we see a 30 reading or higher on the VIX?  We’ve already shown you when and where that happened.  On last look only 6 of the 30 DJIA components were  in positive territory.

As the DJIA and S&P 500 Indexes fall, that VIX will rise; and vice versa.  The DJIA is already more than 500 points off of its new recent highs of 14,121.00.  We won’t tell you whether you should be bullish or bearish on the market as a whole.  It would seem that if this was a true bear market starting, then it would be really hard to find winners out there.  Right now that isn’t the case.  That can change.  The bears are probably finally happy that their short sales at record levels are finally more in their favor.  But the bulls are looking for their picks, and this is a prime example of why traders like keeping cash in reserves for buying opportunities. 

It is always prudent to tread carefully, because you never know how bad things can get.  Markets always go up too much when they get into bull mode, and they always trade down too much in a panic.  You might or might not like George Soros, but this proves over and over his theory: "Contrary to the tenets of market fundamentalism, financial markets do not tend toward equilibrium; they are crisis prone."

Jon C. Ogg
July 26, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.