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The Calm Before the Storm?

By Stansberry Research Interview Series
Wednesday, August 23, 2006

We may be in for nasty weather soon... just ask the VIX.
 
One of my favorite contrary indicators, the Chicago Board of Options Exchange Volatility Index (nicknamed the VIX), measures market volatility based on options trading... particularly the premium investors are willing to pay to protect themselves on the downside.
 
If the VIX is high, it means investors are paying a lot of money to insure a market correction won’t wipe them out. And if the VIX is low, it means investors are calm and unconcerned about the market’s future.
 
Simply put, the VIX tells you how worried investors are about the market. And as such it’s a great contrarian indicator for future market moves...
 
As you can see from the chart below, every stock market correction of the last two years has resulted in big jumps in the VIX. Most noticeable is the correction of May 2006... folks got so scared the VIX more than doubled in less than a month!
 
 
And that’s when it’s time to buy...
 
In the last four months, whenever the VIX peaked and everyone was worried about the market’s future, the S&P 500 rose 3% soon after. It happened in a three-week market rally following the VIX’s spike on June 13, and again when the VIX peaked on July 17.
 
Currently, the VIX is falling back to its historic low levels... and that’s what worries me. Looking over the VIX’s two-year chart, virtually every time the index fell to the 10-11 trading range, the market stumbled.
 
We’re fast approaching September... a month that historically has been bad news for stocks. And with the VIX indicating investor sentiment as practically placid, it may be nearing time to take our profits.
 
Watch the VIX closely over the next three weeks. Right now, it’s telling us investor’s are getting complacent again... which is usually time to preserve your profits and protect your capital.
 
Good investing,
 
Graham




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%