[RT] VIX/OEX Enigma? Or, Divergence?

["Gary Funck" <gary@xxxxxxxxxxxx>]

Recently, there's been some discussion regarding 
the curious divergence between implied volatility (^VIX) and the underlying 
index (^OEX).  Typically, volatility rises as the market drops, presumably 
due to the higher demand for portfolio protection, and the increase in upside 
speculation.  However, recently, we've seen VIX declining while OEX was 
falling as well (though, the last few days, VIX and OEX have been conforming to 
their more typical relationship).
 
Here are a couple of charts to illustrate this 
relationship, along with a tentative forecast.
 
First a quick look at where a few of the well-known 
indices have been over the past couple of years:
 
<IMG height=288 alt=Chart 
src="http://cchart.yimg.com/z?s=^oex&c=^ndx,^spc,^ixic,^dji&a=v&p=s&t=2y&l=on&z=m&q=l"; 
width=512 border=0>
 
This is a percentage change chart 
showing the Nasdaq's dramatic rise and fall relative to the other indices. It 
also shows that ^OEX is strongly correlated to the S&P 500 (^SPX).  
Here's a chart of just ^OEX:
 
<IMG height=192 alt=Chart 
src="http://chart.yahoo.com/c/2y/_/_oex.gif"; width=512 border=0>
And its big brother, the S&P 
500:
<IMG height=192 alt=Chart 
src="http://chart.yahoo.com/c/2y/_/_spx.gif"; width=512 border=0>
As you can see, it has been downtrending 
since Mid-May, and the longer term downtrend starting in Sept-2000 remains 
unbroken in spite of a sharp rally which began in April and fizzled out about a 
month later. here's ^VIX, the implied volatility of ^OEX options:
<IMG height=192 alt=Chart 
src="http://chart.yahoo.com/c/2y/_/_vix.gif"; width=512 border=0>
 
VIX followed its usual script from 
Sept.-2000 to April-2001, making a low in Sept. as the market topped, and a high 
in April when the market bottomed. The mid-Nov. 2000 bottom, however, was a bit 
of an anomaly, because VIX made a low around 20, at the end of decent rally, but 
continued to climb higher all the way into March-2000 as the index rallied 
another 25% higher.  It is possible for the OEX to keep on climbing even 
after VIX puts in a near-term low.  For the sake of argument, I'm going to 
assume that isn't what is happening this time around, and we're seeing the more 
typical VIX-bottoms-and-OEX-tops pattern.
 
If the VIX/OEX relationship holds its 
usual course and does a repeat of the Sept-2000 to April-2001 decline, we might 
expect OEX (and thus, the S&P 500) to drop 15%-25%, over the course of the 
next 4-8 months.  Should this occur, the S&P might dip below 1000, 
possibly as low as 900, breaking the 52-wk low of 1082.  
 
Evidence that the S&P is instead 
ready to rally, and to reverse the downtrend, would be a break of the 
downtrend line made up of the tops in Sept-2000 (1500, approx), Jan-2001 (1375 
approx.),  May-2001 (1300 approx). The downtrend line currently stands at 
about the 1275 level, with the S&P at 1207 (today's 
close).



To unsubscribe from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxxxxxx





Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service.