Option Investor
Market Updates

Eye on the VIX.X

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The major indexes hold fractional gains after Congress passed a $350 billion tax cut by a narrow vote. The news has some tax experts projecting the cut may have roughly $226 billion moving into the economy over the course of the next two years and may give a 0.75% boost to this year's GDP, which some economist's had been looking to show a 2.25% gain and now edging up to 3%.

The news had the major indexes lifting from their lows of the session with the S&P 500 Index (SPX.X) 933.69 +0.19% recovering from 927.47 to then trade a session high of 935.05, which we're now just off those levels.

Sector trends remain positive. Utilities depicted by the Utility Index (UTY.X) 288.45 +4.09% were "hot" out of the gate this morning and continue to build on gains. Part of today's tax cut bull calls addressed the "double-taxation" of corporate dividends. The bill, which is expected to be signed by President Bush later this afternoon proposes that cuts on capital gains from 20% to 15% for most investors, with lower-income investors being taxed at a 5% rate.

Today's trade has seen some moderate intra-day volatility, but certainly depicts a rather quite tone as traders seem content to stand pat ahead of the 3-day weekend.

With that said, I've been thinking there aren't a lot of "trades" to be had in today's session for a swing trader and has me looking around at a few things.

One indicator I'm looking at again today is the Market Volatility Index (VIX.X) 21.43 -0.87%. It was just over a week ago when we looked at the VIX.X to see if a reading of 21.22 based on our "fitted retracement" might find an intra-day reversal, or perhaps trigger some type of institutional option strategies, on the though of some option trades coming into the markets in order to hedge some bullish risk. The "suspicious" decline on Monday, so soon after this observation, once again has me wanting to monitor things at what could be deemed a key inflection point once gain.

Market Volatility Index (VIX.X) - Daily Chart

Lots of traders "know" about the VIX.X, but not everyone "knows" about the bullish % charts, that I argue to a very good job of depicting "risk" in a market. Institutions are experts and assessing and hedging risk, they have to be! I like to monitor the VIX.X when the bullish % charts reach more "overbought" levels of 70% and more oversold levels of "30." When the big boys come to the table and options market, its usually at high and low risk levels as depicted by the bullish %. Over the years, I've found the retracement above does a pretty good job of dissecting the VIX.X into little ranges, and a trader can then be alert to a "level" where some type of action might be found.

The VIX.X does do a very good job in my opinion of reflecting sentiment. See the extreme spikes higher to the left of the chart? That's "fear"! See how the SPX bullish % fell to 12%? That was a low risk environment for selling puts, and raking in HUGE premiums. It's interesting how the bullish % "inflection" points can be tied in with LEVELS of VIX.X. I think traders should be monitoring the VIX.X for a move back above the 25.66 level at this point, to observe a change in sentiment might take place. If the Bullish % charts start reversing lower, we should then expect a pickup in the selling of stocks by investors, selling that most likely has already had some institutions having hedged their risk, and able to provide liquidity to market participants looking to take profits.

Jeff Bailey

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