the VIX

[OldPoop]

I had never heard of the VIX before 8-10 months ago, but now I'm running across articles like this fairly often.


By Dr. Steve Sjuggerud 
Wednesday, January 19, 2011

Investors are more complacent than they've been in many years (as measured by the Volatility Index – the "VIX"). The last time they were this complacent was July 2007... Afterward, stocks proceeded to have their worst crash since the Great Depression. They lost over half their value before bottoming in March 2009.

But complacency itself doesn't cause a crash. Stocks can continue to move higher as investors are complacent.  It's more of a sign of a top when the "dumb money" is piling into stocks – when the dumb money is optimistic. Here's how my friend Jason Goepfert (of SentimenTrader) puts it:

The Dumb Money is usually right during the trend, but when the dumb money gets extreme, the market consistently turns [down].

History suggests that when these traders are confident, we should be very, very worried that the market is about to decline. In practice, our Confidence Indexes rarely get below 30% or above 70%. Usually, they stay between 40% and 60%. When they move outside of those bands, it's time to pay attention!

Right now, the dumb money is at an extreme... Jason's Dumb Money Confidence Index is at 79% – its highest level in years...

So investors are complacent (as the VIX shows). And the Dumb Money is supremely confident (as Jason's research shows).  In short, where do I think the market goes next? The very worst case would be like what we just went through from July 2007 to March 2009. I don't expect we'll see that. But you should have your portfolio positioned for a flat stock market, at best, over the next two to three months.

While everyone else is optimistic, now is a better time to take some profits and reduce your risk instead of trading aggressively.

Good investing,
Steve


In a different article I read yesterday, the author said the VIX was at 75 before the last big downturn.  I have no idea whether or not this guy is right with his prediction for the next 2-3 months, I've never looked into the VIX.  But what amazes me about this and similar articles is that the authors never present a theory as to why the markets do this when the masses make a move, nor do they even seem to be curious enough to ask why.   I've read the same from Contrarian investors.  They seem to be satisfied with "history suggests" or when the masses do such and such "the market consistently turns," and evidently to not look a gift horse in the mouth.  I guess I'm not built that way.

This guy calls us "The Dumb Money".
Stewart Thomson calls us "Elmer Fudd".
IMO, the banksters call us "The Food Source".

[Silver Hog]

yeah, i am no expert, but getting a twitchy feeling about the next downturn.  I am not going all in at the present, hope to jump in at the next ~'bottom' and cash in big time.  Tinkering now with some oversold stuff, but just playing really.