Late today, and admittedly a bit unnerved and possibly not thinking straight after the Dow fell over 750 points near the close and the volatility indexes started to spike again, I sold the 50 shares of PJL, the Trust Certificate containing the Verizon bond, at 21.83 bought at 19.5 on October 8th, and noted in a prior blog. I kept the holding in XFL, another TC containing the very same Verizon bond as PJL, since it was being priced lower, nearly 1 buck lower.
Prior to commencing this blog, I frequently discussed the fear index, also known as the VIX (^VIX at yahoo finance). It has been hovering at levels that I have never seen. Even when the Dow rose over 900 points, the VIX remained well entrenched in an extreme state of fear. It rose almost 26% today to 69.25. Interestingly, the Nasdaq average closed down 150 points or 8.47% compared to the S & P 500 loss of 9%, but the Nasdaq volatility index rose far less than the VIX for the S & P 500, rising almost 16%. For those familiar with my prior lengthy discussions of VIX, it is questionable that any lasting rally can start from such extreme fear levels. It has to settle down first. When people are this worried, they will sell into rallies. A bull market fear index would show prolonged readings below 20 for the VIX. Even doing the meltdown in the Nasdaq and the bear market of 2000-2002, the VIX just touched 40 briefly in 2002. We are now in uncharted territory to say the least. Now, I would suggest that this bear market, which started in October 2007, will be worse than the one in 1973-1974, and it is already worse than the 1987 bear measured from the August 1987 high. So its only rival would be the period starting in 1929 for the Dow average, with special classification for the Nasdaq plunge in 2000-2002. The foregoing reflects the major indexes that have a long history.
Unlike the VIX, the Nasdaq Volatility Index (^VXN at yahoo finance) did rise to around the current level of around 70 in early 2001 and it stayed at elevated levels for almost two more years before it started to settle down with the start of a bull move in 2003.
Some say that the spikes in volatility may be a buying opportunity. I would question that assumption only when the spikes reach levels that we see now, just way outside what is normal even in a bear market, although this may proved wrong in retrospect as many stock market theories are. Nonetheless, I would suggest that there needs to be a prolonged period where investors are no longer governed by base impulses day to day, with the VIX falling substantially from its current levels, and then a buying opportunity may arise.
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