14 December 2006

VIXatious VIX

Adam from the Daily Options Report was alert when he spotted some overbought VIX last week and has noted the now oversold condition here, and therefore possibly short term bearish.

This was also not lost on the folks at Trade King, nor the "sages" at Bloomberg who think it bearish as well.

The Chicago Board Options Exchange SPX Volatility Index yesterday closed below 10 for the first time since 1994, signaling that fund managers are too confident stocks will rise.

Low volatility ``suggests that investors are getting a bit too complacent,'' said Ian Sharman, who helps oversee $1.2 billion at Royal London Asset Management and owns U.S. stocks. ``The market is climbing a wall of worry.''

The VIX is based on prices paid for Standard & Poor's 500 Index options. In the past, lows in the VIX have heralded stock- market declines. There were sell-offs in May of this year, in 2001, in 1998 and in 1997 around the time that the volatility measure reached lows for the year. ===>>MORE<<===

I note the cautious to downright hedged tone to these calls (rightly so) because it is not as reliable a signal as very high VIX.

Along the same vein, when *everybody is thinking the same way, it's often a good time to fade.

I hope not, I'm positioned for sideways to more upside in most positions.

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