8/16/2002. The VIX had just made a double spike above 50.
What did the VIX tell us? Buy (calls)!! Click to enlarge.
July 11, 2003, A Recommendation. Based on the VIX and SPX.
The saying goes, VIX is low, time to go.
Don't let the door hit you on the way out. VIX at 20 is the put buy signal tripwire.
Let's do a paper trade at least, ok?
Which puts to buy(watch)? SPX index LEAPS.
Strike price? 400 looks good. One contract for $0.25/share=$25. Market would have to go up some more for limit order at $0.25 to fill.
Watch this strike price of the put LEAP expiration of your choice for one quarter.
Is there a God? Let's see. Try paper trading this and watch carefully for three months.
If the VIX goes lower to say 19 or even 18? Bet the farm. Change to a strike price higher than $400, try $500.
Why? SPX would be 1060 or more. Nasdaq may be around 2,000.
That would be unnatural even a little weirdo bizarro.
ROI? 100%? 1,000%? Possible depending on the strike price, expiration date, and other factors.
Check the Open Interest on the puts. There are many like minded people ahead of you.
So much for Mr. Anonymous. Here's what Big Bad Bernie says about the "previously arcane indicator":
Schaeffer on Charts: Adding VIX to the Mix, 8/21/2003
"1. The current pattern of VIX price action suggests further downside.
2. Further VIX downside would almost certainly be accompanied by a rally in the SPX.
3. The greater the number of consecutive days the VIX closes below 20, the stronger the arguments in #1 and #2 above.
4. There is no VIX "floor" at 20, as evidenced by the VIX action prior to 1997. On the other hand, brief moves by the VIX below 20 have been consistent with market tops since 1997. The bull vs. bear argument thus reduces to whether post-1997 or pre-1997 VIX patterns will prevail.
5. The heavy focus in the financial media in recent months on the low VIX as a bearish indicator (featured most recently on CNBC yesterday) has bullish contrarian implications. Once a previously arcane indicator becomes widespread in its use, it becomes safe to conclude that the market has already discounted the implications of that indicator.
6. I'd focus on a close by the VIX above 25 as a sign that the 20 level is going to be rejected once again, which would have bearish implications for the SPX."
Once again, Bernie Schaeffer makes the case with a cogent explanation complete with useful charting detail.
Click for VIX information.
In this time of low priced stocks, nothing seems to work to indicate where the market is going next. Prices can be manipulated very easily, to the extent that even the once reliable charting techniques as described in The Visual Investor have become all but useless. Oh, well. What to do? See what Big Bad Bernie says in his second half 2003 update. He has lots of charts for things you might not have considered.
2003 Market Forecast, Mid-Year Update
by Bernie Schaeffer,
"Finally, as I suggested in the June 2003 Option Advisor: 'If you are a sophisticated investor who thoroughly understands the risks, consider buying some put options on the largest-cap blue-chip names. Make sure you buy enough time (at least out to January 2004). And you may want to consider selling lower-delta puts from closer expiration months against your long puts as a way to pay for the time decay.' At this point I'd be looking out further than January 2004 to the January 2005 expiration.
This is a market that is capable of grinding higher for much longer than the bears expect. But it is also a market that is capable of plunging much further and faster than the bulls can conceive. The investment mix I suggest above is designed to lead you safely across this very treacherous territory by taking advantage of the potential opportunities and avoiding (or profiting from) the potential risks."
(Note: You can keep daily track of Bernie Schaeffer's investment portfolio mix by subscribing to Schaeffer's Master Portfolio.)
Options Courses 101, 201, grad level 451, and post doc all in one place. optioninvestor.com
Call plays, put plays, covered plays, spread plays, stradddle plays,strangle plays, calendar plays.
Each week dozens of plays analyzed with specific strikes, suggested entry, exit points, cautionary warnings. If you
trade stocks or funds, use their sector and intermarket technical analysis. Two week free trial. Novices may be
overwhelmed by the sheer volume of info. Experienced traders and investors will recognize that this is the right
Todd Shaver says Bernie Schaeffer's market commentary from the Option
Advisor, is outstandig. For more information or to subscribe to the Option Advisor,
How about another contrarian with a decent record, Marc Faber?
Long Asian Stocks - Short US Stocks
"Incidentally, I also believe that we have just made a major low in the Japanese
stock market. Blue chips and religious stocks like Sony have totally broken down, which
is usually a sign that the bear market is approaching its end. I maintain my earlier
recommendation that 2003 is the year when investors must go long Japanese equities and
short Japanese bonds. It is only a matter of time before investors will pull out money from
the ridiculously priced bond market (yielding less than 0.6%) and buy equities.
At the same time, I have less confidence that the purchase of the S&P 500 above 950 will
produce satisfactory returns over the next five years. Still, I continue to like oil companies,
whose earnings in the first quarter were superb, oil servicing companies and gold mining
companies. Stocks like Royal Dutch (RD), Chevron Texaco (CVX), Exxon (XON),
Woodside Petroleum (WPL AX), Schlumberger (SLB), Diamond Offshore (DO),
Newmont Mining (NEM) and BHP Billiton (BHP) should be accumulated. "
"Knowledge is the best prescription," Dr. Koop
Dr Koop is one of our outstanding
American heroes. He's a big picture guy with exemplary principles. Principles which made him almost $100 million. He's
a cool dude so it's ok with us. We just don't like the style of his beard. It makes him look like Captain Ahab or Abe
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