Some Observations - August 10, 2011

[Timothy Clontz]

The VIX is the volatility index -- basically measuring how much prices are expected to CHANGE in either direction. Since the SPY is up 3% today (when an average up day since 1950 is 0.66%), the volatility remains extremely high.

Most folks are looking for a fast rush up to the long term moving averages (around 1250) before a renewed bear market. That's a LOT of price movement. The VIX should stay relatively high until a new bull market begins.

[adam ali]

Tim, interesting observation. Sort of begs the question that if the VIX continues to drop, at what point will it signal that we are still in a cyclical bull market as opposed to a new bear.

[Timothy Clontz]

If you go back through 23 years of the VIX, there's no meaningful trigger point to indicate a bull or a bear. It's just a measure of volatility. Generally market bottoms are more volatile than market tops, but determining a bull or bear market would need far more analysis than the VIX alone can provide.

P&F charts are showing a bear. 200 day moving averages are showing a bear. The yield ratio movements are showing a bear. Sector configuration is showing a bear.

And the market could zip right straight up to 1600 without blinking an eye.

You just have to be a little more right than wrong.

[ernsttanaka]

The input into the vix formula is the IV on the SPX options. The IV is importantly influence by our fear for the downside.

Since we have more or less an flat VIX - this means more or less put buy and selling is in balance.

AUG SPX contracts are not in the VIX anymore we moved to the SPX SEPT contracts.

You can currently sell the Sept put vertical 1055/1045 for $1.55. That is $155 profit for $845 risk.

We can only conclude that big parties don't like that risk for now. Otherwise orders would come in and the balance between put buy and sell would flip and the IV and in effect the VIX would come down.

Nothing has happened till 3pm EST which has hampered my earlier voiced optimism. I am making some small trades which will profit from a downtrend in the vix.

Ernst