[CANSLIM] Market

From: "Patrick Wahl" <pjwahl@attbi.com>
Subject: [CANSLIM] Market
Date: Sun, 17 Mar 2002 11:28:43 -0700

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I notice that on Friday the Vix hit its lowest reading in about 8 months, the previous 
low readings occurred around early June and July of 2001, and the end of August in 
2000.  If you check the market performance following those dates, you see the 
market had some sell offs.  I don't suppose we have to sell off, but we are probably 
due for a cooling off period at least.

For those unfamiliar with the Vix, here are a few notes from stockcharts.com -

Introduced by the CBOE in 1993, VIX is a weighted measure of the implied 
volatility for 8 OEX put and call options. The 8 puts and calls are weighted 
according to time remaining and the degree to which they are in or out of the 
money. The result forms a composite hypothetical option that is at-the-money 
and has 30 days to expiration. (An at-the-money option means that the strike 
price and the security price are the same.) VIX represents the implied volatility 
for this hypothetical at-the-money OEX option.

Typically, VIX (and by extension implied volatility) has an inverse relationship 
to the market. A chart of the VIX will usually be shown with the scale 
inverted to show the low readings at the top and high readings at the bottom. 
The value of VIX increases when the market declines and decreases when the 
market rises. It seems that volatility would be a two-way street. However, the 
stock market has a bullish bias. A rising stock market is viewed as less risky 
and a declining stock market more risky. The higher the perceived risk is in 
stocks, the higher the implied volatility and the more expensive the associated 
options, especially puts. Hence, implied volatility is not about the size of the 
price swings, but rather the implied risk associated with the stock market. 
When the market declines, the demand for puts usually increases. Increased 
demand means higher put prices and higher implied volatilities.
For contrarians, comparing VIX action with that of the market can yield good 
clues on future direction or duration of a move. The further VIX increases in 
value, the more panic there is in the market. The further VIX decreases in 
value, the more complacency there is in the market. As a measure of 
complacency and panic, VIX is often used as a contrarian indicator. Prolonged 
and/or extremely low VIX readings indicate a high degree of complacency and 
are generally regarded at bearish. Some contrarians view readings below 20 as 
excessively bearish. Conversely, prolonged and/or extremely high VIX 
readings indicate a high degree or anxiety or even panic among options traders 
and are regarded at bullish. High VIX readings usually occur after an extended 
or sharp decline and sentiment is still quite bearish. Some contrarians view 
readings above 30 as bullish.



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