For the second time this year, the feature article discusses the overbought state of the stock market. There are quite a few overbought conditions, and all are enumerated in this article. However, overbought does not mean “sell,” unless some actual sell signals are received – which, so far, have been lacking.
When one says that “the market” is overbought, he really means that a number of trusted indicators are in extreme states of bullishness. Recognizing that “the market” is overbought is only moderately useful. That’s because an overbought market can still rise strongly, while remaining overbought. Things work similarly, but in reverse, for oversold markets.
The feature article deals with the fact that, once again, $VIX is receiving criticism when it really shouldn’t. Most people really don’t understand what $VIX should and shouldn’t be used for. We try to shed some light on the topic, in light of recent articles published on the subject.
There are always critics sniping at $VIX, but they are usually fringe players – often with an axe to grind, such as promoting their own version of volatility calculation or something like that. But recently, the criticism has grown much larger and is coming from the center of the investment landscape.
With the market having broken down in the past two weeks, this issue has a lot to do with volatility. The feature article discusses bullish setups via volatility spike peak buy signals in four different markets. Recommendations are made in GLD, EEM, and AGN.
With the stock market collapsing recently, option implied volatility spiked higher in a large number of markets. Of course, actual (historical) volatility has increased as well, but it is implied volatility that reflects more of the panic mood of the public, and thus is the one that can be used as a contrary indicator.
The feature article discusses the fact that stocks, bonds, and the U.S. Dollar have all been declining together. A hedged position is recommended in Bonds vs. the Dollar.
The $VIX spike peak buy signal was stopped out, but another may be setting up (page 4).
There are times when stocks and bonds move in the same direction, and times when they move in opposite direction. However, the U.S. dollar almost always moves opposite to bonds. Yet, in the last few weeks – ever since stocks topped out – all three markets are under pressure. This is creating a very unusual situation, both in terms of sentiment and probably in terms of economics, as well.
Neutrality, as it applies to option positions, means that one is non-committal with respect to at least one of the factors that influence an option's price. This isn't quite the same neutrality that governments display -- theirs being a much more diplomatic undertaking -- but it is a viable approach to trading options. Simply put, this means that one can design an option position in which he may be able to profit, no matter which way the underlying security moves.
