the vix be 'warned' no dirty talk

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    a bit of old news but something to at least be aware of.............get the chart on bigcharts.com type VIX

    Wall Street's "fear gauge" could signal market top
    TUESDAY, AUGUST 05, 2003 3:50 PM
    - Reuters U.S. Company News

    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.

    © Reuters 2003. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

 
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