>>>Seems to me like the cheney bombing would drop the stock markets more than a chinese rate hike.<<<
An opposing view if you care.
February 28, 2007
12:03 AM ET
The One Indicator You Should Focus on RIGHT HERE!
There's really being no good fundamental reason that the stock market sold off so sharply Tuesday: yes, Chinese stocks dropped 9% to help get the decline started in the U.S., but remember China is up around 130% over the last 12 months. If you've ever traded a stock that's more than doubled in less than a year, you know that a 10% correction on certain days is normal and healthy within a long-term bull trend. I think China (measured by symbol FXI) should settle back a bit more near 90, down about another 5%, at which point it's a buy on my charts for the next 6-12 months.
So did the alleged Taliban attempt on Dick Cheney's life have any affect? I think that's the weakest excuse I've ever heard...Next!
The bottom line is the market was coming off a complacent recent peak, where the CBOE Volatility Index (VIX) had just hit under the 10.00 level about a week ago, near all-time lows. When no one expects any volatility is EXACTLY when the contrarian should expect plenty of volatility to come to catch the masses by surprise.
But NOW, the VIX Tuesday showed an unbelievable sign of a fear panic now in place: the 1-day percentage jump in the CBOE Volatility Index (VIX), which gained 61% today! That's the biggest 1-day jump in the VIX in percentage terms EVER! That tells you investors really hit the panic button today, and now with most investors and commentators talking about moving to the sidelines, you have to be ready to catch a likely retest of the lows from Tuesday that's likely to come in the next couple of days.
More importantly, the VIX closed just under 18 off an intraday peak at 19. Plot the VIX on your weekly chart, and go back and look at the importance of the 20 level, both in the bull market phase from 1991 - 1997 and since the 2003 bull market began. Every test around 20 is typically very bullish for stocks in the long run, as even the brief test over 20 last June was a classic fear spike to be bought right at major lows.
So keep a super-close eye on the VIX indicator and the all-important 20 level. I'd expect to see some downside probing either tomorrow or Thursday, and any touch up to 20 is likely to be a gift to buy in the big picture. And with the Fed staying on the sidelines or perhaps now even posised to ease, there's no reason to expect this to turn into a 1987 situation, which was driven then by fears of higher interest rates.
So don't be suckered by the fearful commentators all saying step to the sidelines - there's opportunity here, and you have to be ready to pounce!
Trade Smarter,
Price Headley, CFA, CMT - Founder & Chief Analyst
