Options Volatility Spiking

  • September 24, 2001
  • Len Yates

It’s
so easy to get caught up in the emotional tide and be swept away.
I switched my 401K from mutual funds into cash last April, at the worst
time, and this past week, in the midst of the deluge (on Wednesday), I did it
again. Will I be wrong again?
Probably, if I don’t buy back during the next few days.

I slept well last
night. It’s the weekend.
The sun is out. People seem to be
feeling better now, as do I (following the unspeakable events 10 days ago).
Not that we’re going to forget. But
I think it’s OK to go ahead and feel better, don’t you?

Sitting down to the
computer and looking at charts, digging into some research on stock valuations,
I suddenly realize where we are — near a bottom.
My best guess is we’ll form a double bottom here, and then head up.

Three
reasons:

  1. Valuations
    are screaming.     (They were bargains back in
    April, but I was too busy being sure, from chart patterns, that the market
    was going even lower to even bother checking.)
    Examples of high growth, high-quality companies would be Harley
    Davidson
    (
    HDI |
    Quote |
    Chart |
    News |
    PowerRating)    , AmeriCredit
    (
    ACF |
    Quote |
    Chart |
    News |
    PowerRating)    , Nokia
    (
    NOK |
    Quote |
    Chart |
    News |
    PowerRating)    , Schwab
    (
    SCH |
    Quote |
    Chart |
    News |
    PowerRating)    ,
    and Cree
    (
    CREE |
    Quote |
    Chart |
    News |
    PowerRating)    .



  2. Fear
    is running wild right now    . There
    was a lot of fear in the markets last week, prevailing over patriotism, as
    we knew it would, causing investors to dump their stocks and mutual funds at
    what will turn out to be the worst time.



  3. Options
    volatility spiked big time on Friday     — the VIX reaching an
    astonishing 57 before pulling back to 48 by the end of the day.
    Volatility spikes like that always mark a bottom.

And why do I think
there will be a double bottom? Because
panic swoons always seem to culminate in a double bottom.
I could be wrong, but that’s how I’m going to play it.

Here is a chart of
the VIX.

 

Note how the pattern
of the past week resembles the pattern of mid-March.
Implication: We will see the market settle down for a few days, and then
one more volatility spike.

Â