Wednesday, September 24, 2008

Chart of the Day: Fear Still Elevated

The market closed roughly flat today, with the S&P 500 a bit lower, but the Nasdaq a bit higher. Volume was once again pathetically low. NYSE volume was the lowest its been since the Friday before Labor Day weekend.

There was continued angst today in the credit markets. Most people don't follow these indicators, but if you look at things like the LIBOR swap rates or the TED spread, both were high and rising today, a sign that global credit markets are still extremely tight.

As for the equity market, I want to take a look at the volatility index (VIX), or the "fear" index. The VIX closed lower today, which was a good sign. But it is still very elevated at the level of 35.19. A look at the chart below shows that the VIX has had roughly a week's worth of closes above the 30 level, a rare occurrence.

Back in March 2008 (see below), at the "Bear Stearns bottom", the VIX also spiked above 30. But in March, it only had 2 closes above the 30 level before reversing lower. That signaled a good buying opportunity.

Ditto for August 2007, another panic low in the market spurred by the initial signs of this credit crisis. Last August, the VIX again broke above 30, but only had 2 closes above that level before reversing lower. Again, this was a good buying opportunity in the market.

The last chart goes all the way back to October 2002 to find another period when the VIX spiked north of 30. October 2002 was the bottom of the last great bear market. Notice that back then, like now, the VIX not only got above 30 but spiked all the way to 42. It also reached 42 last week.

You can see that the VIX stayed around these elevated levels for a couple of weeks, as there was widespread disbelief that the market had bottomed. But eventually the VIX began to work its way lower, and signal that fear had peaked and was easing. This was probably the best buying opportunity of the last 25 years.

I am not saying that last week was THE bottom of this bear market. We will only know that with hindsight. But I do think that if Congress acts quickly to pass this plan, the markets should stabilize. I am sure that the powers that be would like to do everything in their power to support a firmer market before the election and into year-end.

Yesterday, I took profits in the remaining SPX hedge I had on. So I am taking off my downside protection and looking for signs of stabilization in the market. I see lots of attractive opportunities in the market, but do not want to put cash to work until I see more positive price/volume action in the markets.


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