Ameritrade (fka AMTD)

[FRED8]

Jake & All,

While I do not necessarily agree 100%, here's something else to consider, and the important thing being how many agree with this (not just me or Art).

(Post Credit & Thanks: Art2Gecko)

Wall Street's "fear gauge" could signal market top

By Doris Frankel
CHICAGO, Aug 5 (Reuters) - A popular contrarian stock index
used by some players to forecast market turns is rising and may
be poised to break out of its trading range, marking a
short-term top for stocks, several analysts said.
The indicator is the Chicago Board Options Exchange's
Market Volatility Index <.VIX>, known as the "fear gauge" since
it measures how worried investors are.
"The rise in the VIX is occurring amid growing worries
about the economic outlook. The trend is especially evident in
the financial sector, where anxiety levels are rising in
lockstep with interest rates," said Frederic Ruffy, analyst
with Optionetics, an options strategy and education firm.
With the bulk of the earnings season past and trading
volumes light in the typically slow summer season, Wall Street
stocks have been stuck in a range after a double-digit
percentage rally from 2003 lows hit on March 11.
The levels considered significant on the VIX vary, but
since May, the VIX has been locked in a range roughly between
21 and 24, which suggests growing complacency among investors.
A low VIX, normally in the range of 20-25, is said to
suggest an overly optimistic market susceptible to setbacks,
while a spike in the VIX to levels over 40 typically signals
extreme fear among investors and often occurs near major market
bottoms.
The index, which spiked to just over 57 on Sept. 21, 2001,
in the post-attack trading week when stocks carved out
three-year lows, hit an intraday high of 41.16 on March 12,
2003. At that time, the S&P 500 index bottomed with a close of
804.19.

MOVING HIGHER
For the past eight sessions, the VIX has crept higher. On
Monday, it peaked at an intraday high of 24.90, a level not
seen since May 20.
The VIX continued to move higher on Tuesday as stocks fell
after a report showing that the U.S. services sector expanded
at a surprisingly strong rate failed to rouse investors.
"This rise in the VIX may only be the beginning of higher
volatility to come as we just recently touched under the key 20
level" of 19.63 on July 24, said Price Headley, founder and
chief analyst at BigTrends.com, an options advisory firm.
The VIX is calculated by measuring the premiums of
short-term options on the Standard & Poor's 100 index <.OEX>,
or how much investors are willing to pay for the options as
insurance to hedge their portfolios.
Historically at 20 or lower, the VIX has marked a top in
the market, as investors show little interest in insuring their
portfolios with options when the news appears strongly
positive, Headley said.
But typically when stocks move lower, investors buy puts to
hedge the risk in their portfolios. said Richard Croft,
president of Croft Financial Group, a Toronto-based investment
counseling service.
A put gives the holder the right to sell the underlying
stock at a predetermined price within a set time period.
"The cause and effect of buying these puts means that the
puts become more expensive and that is reflected in the VIX,
which is moving higher," Croft said.
The last several times that the VIX crossed under 20 marked
significant tops in the stock market. Those days included Aug.
17, 2000, when the VIX hit a low of 19.81 and March 21, 2002,
when the VIX hit a low of 19.89, Headley said.
Greg Simmons, president of Linear Capital Management, a
California-based hedge fund, believes the VIX has been oversold
for too long and is due for a breakout.
"I would not be long the market for one second. I would
assume the VIX will retrace approximately half of its drop from
the March highs of over 40 and go up to test the low 30s which
would translate into much lower stock prices," Simmons said.
((Reporting by Doris Frankel, editing by Eric Walsh;
Reuters Messaging: [e-mail];
[e-mail]; 312-408-8750))

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companies around the world.



nN05527611


Aug-05-2003 19:48 GMT
Symbols:
US;OEX US;VIX
Source RTRS Reuters News
Categories:
DNP DRV E LEN PCO PCU RNP RTRS STX U US MST/F/DRV MST/I/MKT MST/L/EN
MST/R/US MST/S/NDX REV5 RSF TGT/RSF
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Best, F8