20 October 2008

Monday/Outta Site (Outta Mind)

Wilco closing out its set at '08 Lollapalooza. A couple of rockin' Wilco tunes for a rockin' Monday.

The Gray Lady shone a spotlight on the VIX today. Here's my spotlight on the Times' spotlight:

Put simply, the VIX measures the degree to which investors think stocks will swing violently in the next 30 days. It is calculated in real time throughout the trading day, fluctuating minute to minute.

The higher the VIX, the bigger the expected swings — and the index has a good track record. It spiked in 1998 when a big hedge fund, Long-Term Capital Management, collapsed, and after the 9/11 terrorist attacks.

Mr. Sachs, with some incredulity, said that the swings in the stock market have reflected the volatility implied by the VIX.

"We had a 17 percent peak-to-trough trading range this week," he said. "It should take two years under normal circumstances for the S.& P. 500 to have that type of trading range."

The VIX had its origin in 1993, when the Chicago Board Options Exchange approached Robert E. Whaley, then a professor at Duke, with a dual proposal.

"The first purpose was the one that is being served right now — find a barometer of market anxiety or investor fear," Professor Whaley, who now teaches at the Owen Graduate School of Management at Vanderbilt University, recalled in an interview. But, he said, the board also wanted to create an index that investors could bet on using futures and options, providing a new revenue stream for the exchange.

Dow rose 4.7%; the S&P rose 4.8%. Looks like the market shed some of its fear, right?

The VIX dropped 24.7% to close at 52.97. That looks like a pretty big affirmative.

Except last Tuesday, the VIX dropped below 50 before cracking 80 two days hence.

I spent the day watching my positions rise from 2% to 10%. The RSI(2) of the S&P 500 closed at 79. If it approaches 90 tomorrow, I may unload some shares. Otherwise, I'm content to remain a market spectator.

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