Have you seen where the VIX is trading lately? If you are not familiar with the VIX here is some background info from one of our favorite sites www.investopedia.com. ”The VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk.The index is often referred to as the investor fear gauge”.
Okay, back to the current status of the VIX. After today’s trading the VIX has once again closed under 11, a historically low level. Going back over the previous year whenever the VIX reached a level this low while in an “overbought” to “very overbought” position this signaled a short to intermediate-term decline. Furthermore, I looked back to see how the market reacted when all four major indices were in a “very overbought” and this was also a good signal that a short-term reprieve was right around the corner.
The market was in a similar situation last month. I stated in the blog “Historically, this usually precedes a short to intermediate-term decline and with all of the info that seems to be piling up on the bears side we should expect the same result this time around. We must remember the week of options expiration can be extremely volatile and can often fool many into adding positions that ultimately fail. Will this time be different? No one knows for certain, but with all of the information that we have sitting in front of us I can only side with the probabilities and this time (at least over the short-term) they are leaning towards the bearish camp. Only time will tell.”
The market traded sideways during the week of option expiration only to move lower the following. I was able to take advantage of the situation (as reported on our performance page) as we entered into a two day trade which reaped profits of 10.4%.
The upcoming option expiration promises to be an intersting one. Have a wonderful and safe weekend!
RSI Wilder (5) for October 13, 2006
- SPY - 87.2 (very overbought)
- DIA - 91.2 (very overbought)
- IWM - 82.6 (very overbought)
- QQQQ - 85.9 (very overbought)
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Andrew Crowder, Chief Investment Strategist, Crowder Investment Research, LLC