Various Views On The VIX

All alliteration aside, two interesting articles popped up this morning on the VIX index, the so-called fear gauge for stocks.

Mark Gongloff pens a fairly pedestrian piece in today’s Wall Street Journal, suggesting possible complacency in the stock market as traders enjoy the holidays. The year-end holiday trading action is well-known and markets tend to drift higher on low volumes (even during last year’s monster crash, markets moved higher during the December holidays). However, with the VIX now at its historical average, Gongloff questions whether the markets underestimate potential dangers lurking in 2010.

Bloomberg posted an insightful article highlighting the 22% gap between 1-month and 1-year S&P 500 options. The authors note 2001 was the last time this gap averaged higher than its current level and the stock market dropped 49% five months later. One might infer that markets anticipate smooth-sailing through the holidays but are bracing possible storms in the year ahead.

Here at the Enlightened American, I avoid basing investment decisions primarily on macro-economic outlooks or market-timing predictions. Instead, I focus on fundamentally cheap opportunities, even if these may be at odds with the bigger picture. Sometimes, the stars will align and both the macro and fundamental picture say the same thing.

Right now, they both suggest that the market is overpriced. As such, investors may want to step away from the stock market and just enjoy the holidays.

More on this topic (What's this?)
(ETN) High Anxiety
New Cash, New Expansion Plans for XO
My Favorite Christmas Traditions
Read more on Volatility Index (VIX), Holiday Season at Wikinvest

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