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Friday, January 11, 2013

Selling Fear In Stocks, Easier Than Shooting Fish In A Barrel

Selling fear in the investment world is easier than shooting fish in a barrel. Does a falling VIX mean trouble ahead?

Those anticipating trouble with leverage often don't survive long enough to say "I was right but early." A quick, objective review of the VIX says not only are lower readings possibly but also bouncing along the bottom can last for weeks, months, even years before a top materializes (chart 1).

A study of the VIX alone; therefore, is not enough. Market tops tend to be preceded and/or coincide with negative divergences of price and trend energy (still positive), and statistical concentration at or near important cycle dates (chart 2, 3, 4, and 5).

Chart 1:  VIX


Chart 2: Large Cap Stocks Capital Appreciation Index (LCSCAI) and Cycle Z Scores (LCSTRIC1 & LCSTRIC2)


Chart 2: Large Cap Stocks Capital Appreciation Index (LCSCAI) and Cycle Z Scores (LCSTRIC3 & LCSTRIC4)


Chart 4:  Small Cap Stocks Total Return Index (SCSTRI) and Cycle Z Scores (SCSTRIC1 & SCSTRIC2)


The cycles of greed and fear can be clearly viewed through long-term analysis of dividend and dividend yields. Do you think the public was a buyer of 1932, 1974, and 2009? Do you think they sold greed in 1929, 1958, 1987, 1997?

There will be more major buy and sell opportunities for stocks. A selling opportunity which the vast majority of the investment community will miss should be next. Those that ignore their emotions and act with discipline are most likely to catch it.

Chart 5:  Large Cap Stocks Capital Appreciation Index (LCSCAI) and Dividend Yield Cycle Z Scores (DYC2 & DYCWA)


Headline:  Why VIX's Recent Plunge May Be Bad for Stocks

After a historic decline, market volatility really has no place else to go but up.

In the near-term that's probably bad news for stock prices, which have rallied in 2013 but likely are in for a rough ride over the next several weeks.

"We're likely to come into a period of volatility that would be parallel to the volatility we saw when all of a sudden it was realized we weren't going to get a deal on the 'fiscal cliff,'" said John Stoltzfus, chief market strategist at Oppenheimer. "Overall the market is poised this year to continue the process that we saw last year."


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