Monday, October 13, 2014

VIX Volatility Weekly Chart

The VIX weekly chart is above 21 at he same levels where all the prior significant market lows occurred (for the last two years only). There is a whiff of worry and fear in the air as the heightened volatility indicates. As Keystone has preached over the last few months, you want to refine your long shopping list and now finally begin to nibble on the long side for the positions you favor. Aren't you happy you trimmed your longs, held a large cash position and minimized the damage of the market downturn? Many of you are likely very happy you did not chase the long side since even many of your favorite longs are beaten down.

The CPC put/call ratio is up to 1.20 indicating an increase of fear by traders although this is a hair below the recent highs that are consistent with identifying near-term market bottoms. The CPCE put/call ratio is up to 0.87 the highest level since the August stock market low when it printed at 1.05. So fear is increasing but traders do remain somewhat complacent despite the market selling in recent days. The higher put/calls are consistent where some nibbling on the long side of stocks may be prudent for the short term.

Fear and panic that creates a longer term multi-year bottom is not indicated until the VIX moves above 40 which is a long ways away. There is likely far more serious selling on tap for the weeks and months ahead. Volatility has steadily dropped since the March 2009 market bottom because of the Fed's Keynesian money printing that has pumped the stock market higher for the last 5-1/2 years. Volatility is likely beginning the transition from the steady down move representing a higher stock market (green channel) to the red channel where the VIX should stabilize and begin trading at more normalized levels at 15-25 going forward.

So some nibbling on longs is prudent and if markets turn further south and volatility spikes higher then you would want to add more longs as the market drops. If the VIX retreats and drops sub 20, under 18 and heads lower then a relief rally will be firmly in place for stocks. So a relief rally may be on tap but remain cautious moving forward. Watch to see if the put/call ratio's spike further to indicate more fear and panic, or, if the ratio's retreat lower that will indicate that a near-term bottom is in place. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

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