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Concerning the VIX below 20. An update from earlier today:

http://www.optionetics.com/articles/article_full.asp?idNo=8762

Optimism about the future pushes CBOE Market Volatility Index ($VIX) below 20. Both economic and earnings news has created confidence, even though the major market indices are seeing just mild gains in midday trading. Nonetheless, with the VIX moving below 20 today, traders should be cautious about entering short-term bullish strategies.

Economic news was positive on Thursday, with weekly jobless claims falling below 400K for the first time since mid-February. Estimates were for a reading of 420K, so the drop was unexpected. However, economists are quick to point out that the numbers are hard to take at face value due statistical variances in July. Nonetheless, the move is in the right direction and has added some hope that a lagging labor market is bottoming out.

Biotech stocks got good and bad news on Thursday, leading to just a minor gain for the Biotechnology Index ($BTK). Biogen (BGEN) shares are down more than five percent today even though the company beat estimates by two cents a share. The reason for the decline is that trials for their Crohn’s disease drug were disappointing. This also has pushed shares of Elan (ELN) down more than 25 percent.

Software stocks are leading the advance today, with the CBOE GSTI Software Index ($GSO) up nearly 3 percent. Microsoft (MSFT) shares have added one percent after telling analysts that they would hire up to 5,000 workers this year, as well as boosting its R&D spending by 8 percent. Positive earnings news from several software companies has also added to the bullish move for the sector. Both Symantec (SYMC) and Veritas (VRTS) are up more than 10 percent after announcing better than expected second quarter earnings.

Though the news has mostly been positive today, there is one glaring negative that traders need to be aware of. The VIX has finally moved below 20, which is normally a sign of a market top. Even though stocks could continue to move higher for a while or move sideways, a reading of 20 normally means that lower prices are ahead. The last time the VIX moved below 20 was March 21, 2002. Within one month, the S&P 100 ($OEX) had lost 5.5 percent, with these losses accelerating through July. This doesn’t mean it is going to happen this way again, but should raise a red flag when trading bullish option strategies.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site

http://www.optionetics.com/articles/article_full.asp?idNo=8762