| Next Week Index |
|
|
 |
|
|
 |
|
Buy low. Sell high. Don't you wish you could enter a buy stop linked to the VIX? Something like a VIX over 50 would trigger the buy stop which would execute as a market order. Or something like a VIX under 20 would trip the sell stop which when triggered would execute as a market order. Well, guess what jelly bean? You can't do that. Why? Think about it silly. If everyone could do that everyone would win in the Market. And everyone doesn't win in the Market. Get it? Is this a good time to buy stocks? The perenial question. Are stocks an investment or are stocks a gamble? The job of the media and your broker is to convince you that stocks represent the former and not the latter. Day to day movements are explained with excuses which don't matter at all. Why the Market is going up or down is mostly unimportant, especially when it is a gigantic lie as was the case with most of 1998 and 1999. Ask people who bought stocks in 1998 or 1999 or 2000 if they don't feel damasareta, a Japanese word meaning, tricked.
The reasons seem just reasonable enough to give the stock market a facade of respectability which makes the shell game believable. Brokers could watch the VIX and tell clients exactly when to buy and sell. CNBC could watch the VIX and tell viewers when to buy and sell with at least a 900 batting average. Wouldn't that be wonderful? Nope. Because guess what would happen? The whole Market shell game would collapse. The whole business is predicated upon seducing "investors" into buying high and selling low while appearing to give them information necessary for buying low and selling high. Every stock broker and every Market pundit knows very well what is causing Market movement. Every stock broker and every pundit knows very well that second hand, mostly irrelevant excuses are used to explain Market movement. These folks give you so much bogus information that it appears that nobody knows who's on first. Their job is to misinform. And they do it well. If they didn't people like you wouldn't even think about buying stocks. John Murphy phrases it more gently in the Conclusion section of
The Visual Investor.
What do you need to know? The VIX. The VIX tells you when to buy low and sell high. What does a VIX spike mean? What's happening when the VIX spikes so high? Traditionally this question would be answered by saying a couple of things, both of which are either misleading or miss the mark. PFC, par for the freakin' course in the Market. First you'll read that there exists fear and uncertainty at the time of a VIX spike. Second, you'll read that because of this fear of the Market falling people buy puts. That's why the put/call ratio jumps up in a flurry of options trading activity. The Kabu Sensei says that these explanations are sort of true. But the truth to baloney ratio is about nine to one. Erai hito are neither fearful or uncertain. They know that the Market is at a nadir. How do they know? Have you ever heard that it's not what you know but, who you know? That's how they know. They get inside information from a Big Kahuna or they are that Big Kahuna. Now if the big Kahuna says that the Market is at a bottom, what's the obvious thing to do? Right jelly bean, sell puts. What? Sell puts? But that's dangerous, isn't it? Well think about it, silly. Why the heck would anybody buy a put at a Market bottom? That's as dumb as waiting for a Market top to buy a call. Only a dummy would buy a put after the Market had taken a big drop Most of the time nobody thinks about who sells a call or a put when they buy those calls and puts. There are people who pay millions of dollars for the right to work in the pits. These people don't mind paying two or three million dollars or more to work the pits and make the Market move. They don't mind being objects of derision and contempt either. Why do they do it? The fun? The Excitement? They do it because they can make the spread. They set the bid and the ask. They make a lot of money. They are commonly refered to as the Market Makers. Most of the time they do have quite a bit of control. It is these individuals who sell you the calls and puts you buy. It is these individuals who buy the calls and puts you sell. It is these individuals who are on the other end of every stock or options transaction you make. But in the case of a VIX spike, the Market Makers working the pits get inundated with sell orders for puts from the consigliere of the Big Kahuna. Market Makers get stung when there's a VIX spike. They may get stung big time. In the next days and weeks they are stuck with puts they bought at prices much higher than what they can sell them for. They bought them low and have to sell them high. They can make up for the losses by selling calls as the Market moves back up. And that's what they do. Kabu Sensei says you will read other explanations for the rallies which inevitably follow VIX spikes. Other explanations for the rallies which follow VIX spikes are just Tate Mae baloney designed to get people to ignore that the big Kahuna pulls the puppet strings. But there is an absolutely astounding number of ignorant people who watched the activity of the Market from 1998 to the present and still remain optimistic that plutocratic wire-pullers don't call the tune. The Kabu Sensei says he isn't moralizing here. If you want to understand the Market, you have to know how it works. You have to have your head up and your eyes open.
The VIX has been the surest Market indicator. But will the nature of the VIX change? Will the range which is considered low or high be shifted upwards by ten points or so? The next couple of weeks or so will give us insight into that question. Let's consider the manufactered rise of the Market during 1999 an aberation. The further we get from the VIX spike, the more uncertainty increases. The pattern for the previous five years or so indicate that the VIX is supposed to be lowest in July or August and then spike in about October or so, as a general rule. Earnings considerations suggest that stocks can be held from the spike in late fall through the second quarter run up of the following year. In June, stocks are dumped in the run ups to the second quarter earnings reports when the VIX registers its yearly low. This year financial pundits manufactured sufficient pessimism in June and July so that the usual pattern has been offset by a couple of months. Normally during the last months of summer, after the last of the earnings reports have been made public, people can relax and go on vacation. Yachtsmen trade with the VIX. This year the pattern has been altered so that the buying time for stocks appears to have been moved up. The time to buy is when the VIX is high. Are we entering a time when yachtsmen can not relax and trade with the trusty VIX? Will there be wide swings in anxiety induced by the bearish tone of the Market? Will the range of the VIX change so that the VIX will be considered low at 30 and high at 60 or more? It could happen. That would make life uncomfortably unfamiliar for yachtsmen traders. Who are the Yachtsmen traders? Can fretters become yachtsmen? Most fretters hope so. Market Timing Using The VIX, July 28, 2003, by Larry Connors, TradingMarkets.com
Our advice is to tell all your friends to forget about the VIX. Tell your friends to tell all their friends to forget about the VIX. A long explanation isn't necessary, just say, "Hey there's no connection between the real world and the VIX and all options are dangerous." [$$-free trial] Volatility Suggests Rally Could Be Near
|
|
Check the five year VIX chart from Bigcharts.com
|
|
|
