When searching for Conviction or Fear, look to the VIX

June 30, 2008

The markets opened weak on the heels of soaring oil that traded to a new record high, yet again. However, money came off the sidelines as oil prices pulled back off of their highest levels of the day. Some investors were looking for deals after last week’s sizable selloff. When the bell rang it was a pretty flat day that saw small gains in the large caps and some selling in techs and smaller caps.

Interestingly, the Dow, which is flirting with a technical bear market, has already sold to a level below its previous lows of the year and the S&P is nearly there. The Nasdaq on the other hand still has a ways to go before it approaches those levels. The fact that we have not yet test those lows in the S&P and Nasdaq is a bit concerning.

Keep an eye on the VIX (Volatility) index in the near future. A near term low is often signaled with a spike above 30 and we are quite a way from that level at 24.  The VIX gives a good indicator of fear and greed levels in the markets and at this point we haven’t seen those levels that we did earlier in the March. Therefore there still exist the potential for further downside despite the relative strength indices signally we are oversold. 

Right now is not a time to initiate a new position long or short as the VIX is not giving a clear signal as to which direction. We want to be cautious until we see the VIX spike, giving the signaling that fear, not fundamentals is driving investors out of the market. So for the time being be VERY selective with your trades and be overly protective of your capital. This is not the time to take risks in the market. Be discipline because the markets will still be there even if you miss out on a small relief rally that is due.

Here’s the NASDAQ and S&P Charts…