Red-Hot Resources

"Luck is not chance, it’s toil; fortune’s expensive smile is earned.”

Friday, November 09, 2007

Something Wicked This Way Comes

UPDATED: See below.

The VIX is a widely used measure of market risk. Its full name is the Chicago Board Options Exchange (CBOE) Volatility Index. How does it work? It shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts.

VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets. That's why the Vix is also known as "The Fear Index."

So what is the Vix telling us now? Let's look at a daily chart ...
The Vix seems to be at a crossroads right now. However, its momentum, as measured by MACD on the bottom of the chart, is bullish. This tends to be market bearish.

Now, let's look at a WEEKLY chart of the SPY, which tracks the S&P 500 ...

We are seeing a weekly sell signal on the SPY. If it closes at these levels, that will be very bearish.

I mention all this because CNBC has had one tout on after another today to say there are great buying opportunities in the market right now, especially in tech and financials. Maybe. But I think while things may look cheap now, they can get a lot cheaper.

How do you play it? Well, You can always buy the ProShares UltraShort S&P 500 ETF (SDS). In Red-Hot Resources, we're targeting tech with the QID, which is designed to return 200% of the inverse of the QQQQs. That position is up over 5% from our tracked entry point yesterday. And a few days ago, I recommended Red-Hot Resources subscribers buy the ProFunds UltraShort Real Estate Fund (SRS).

You can also use options on the indices, or on your favorite weak stocks. And in the futures market, you can play the Vix itself -- the CBOE has futures and futures options on the Vix Index.

I may look at inverse funds as short-term protection for Red-Hot Canadian Small Caps and Red-Hot Global Small-Caps as well. But I want to see how the markets close today. That should let us know where we stand.

Good luck, and good trades

UPDATE: The S&P 500 closed below that weekly support line. If we see a bounce early next week, I'll probably use it to get short, using some of the ultra-short ETFs, as protection in Red-Hot Canadian Small-Caps and Red-Hot Global Small-Caps.
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