I’m noticing some signs that the markets could be poised to start off 2009 on a down note. The Vix has seem to have found some support in the low 40’s now that volatility has dropped considerably. Renewed selling in the markets will cause investors to stress and bring a new wave of volatility causing the VIX to rise.

Looking at the chart above investors have become complacent and rather bullish as the number of call options is largely in favor when you compare them to the number of put options being bought. This is not a good sign that this small rally that has taken place since the November lows has lasting power. As cliche as it sounds, the markets have to climb a wall of worry. Many investors are skeptical as the market rallies and it’s this buying pressure when they cave that continues to fuel a rising market combined with other investor who rush in when they fell like they are missing out. The moment that everyone is on one side of the call option trade is the moment that the market is ready to turn lower.

Sentiment indicators like the VIX and CPCE are always secondary and you should always pay attention to price/volume action on the indexes first and that is not looking so hot either. It is hard to interpret holiday action as we could come roaring back next week or after the new year, however now the markets seem to be rolling over and that should be respected. Now is not the time to make bets and hope the markets will fly out of the gates next year. The year will be all about learning from this historic year and any mistakes you may or may not made to improve your overall performance in 09′.

2 Responses to “Sentiment Indicator”

  1. Dave Ambrose Says:

    "Renewed selling in the markets will cause investors to stress and bring a new wave of volatility causing the VIX to rise."

    I think the perfect spark for the renewed selling may be the Madoff scandal. I read that anonymous letter the SEC regarding the possible fallouts of Madoff being exposed and one of them is that certain hedge funds would impolde and another is that there will be forced selling on the part of funds invested in Madoff since their balance sheets just had a chunk taken out of them and will have to meet various margin calls.

    I have the documents in PDF is you'd liek to give them a read. Just let me know.


  2. Jeff Pierce Says:

    That's a great point regarding Madoff and this scandal being a catalyst for the next push downward.

    I'm not ready to say were going to hit new lows yet, but my signals are pointing down (even more with today's selling) and I'll continue to reevaluate the charts on a weekly basis to try and determine if the trend will continue or if it looks like it will turn.

    If you could send that document to jeff@zentrader.ca I'll take a look at it over the holiday.


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