Gauging Market Fear: Put/Call Ratio and Volatility Index

Two fear gauges many people use in the markets are the Volatility Index [VIX] and the Put/Call Ratio. And, both are getting close to levels that historically signal the intense fear in the markets we've seemingly been waiting forever for. Why are we waiting for such fear? Because it typically marks an opportunity.

First, my man Stewie has a great Put/Call chart up illustrating the historical levels of the ratio. As the ratio reaches 1.20, you can see that it has coincided with market lows/tradable bottoms. Therefore, while the market is down big and there is some level of fear... there is no true panic yet. The assumption would be that we are well on our way to true panic and levels of 1.20 on the Put/Call Ratio. If this becomes the case, I would look to start buying a few names for a trade at the very least. Don't you just love buying when there's blood in the streets?

As the chart illustrates, those levels on the ratio have marked tradable bottoms (but not THE bottom). This is pure chart candy right here:

click to enlarge

Second, VitalTrends has the historical Volatility Index [VIX] chart posted up for us. As the VIX blasts past 30, a strong level of fear usually sets in. Then, once you get as high as 35-37, panic and capitulation often occur. Now, that's not to say that we could always go even higher on the VIX and reach ever new levels of fear. However, historically, a VIX of around 37 has been a tradable bottom as it marked intense fear and capitulation.

If you were to overlay this chart with a chart of the market, you would find that those spikes in the VIX would coincide with tradable bottoms in the market (but not THE bottom).

click to enlarge

What’s the point of gauging fear? Well, It indicates opportunity. Should panic truly set in, we should have a very tradable bottom on our hands (emphasis on 'tradable,' as this is not THE bottom). We'll see what happens.

Sources:

Stewie and VitalTrends

Comments

[cpeterka:]

One thing I am happy for is that the Bush plan for privatization of Social Security happened. Thank the Lord I put all my retirement money into those solid stocks, GS, AIG, FNM, FRE, WB, GE etc... Now I'm set for life.
... This cardboard box is really nice, and the overpass keeps the rain out, and it's concrete floor keeps the fires away, but the LA Smog is a bit tough on my lungs. Luckily my severance package included a free pack of aspirin.
[ Satire, folks... Yuck it up.]

2008 Sep 18 06:15 AM

[Trader T:]

If you think Social Security will be paying out benefits beyond 2020, I have some LEH stock to sell you. Social Security is a government fraud greater than FNM or FRE and you are a fool if you plan on it being around for more than 10 years or so.

2008 Sep 18 07:38 AM

[ain't no fo...:]

Been thinking the same thing on the SS privatization thing... wonder if dumbya ain't so dumb and knew 3 years ago this meltdown was coming... they tell you not to wait until you're 65 or older to start taking it, because the payments will be higher, but the longer you wait the bigger the chance they pull the plug on it altogether.

I will be accessing it the day I hit the eligible age 62+...

Market folly, having trouble correlating your charts with my CBOE Put/call stats.. is that 21 day an equity only, index only, or both?

Thanks

2008 Sep 18 09:25 AM

[Augustus:]

cpeterka,
Find a price on a credit default for getting your SS payment 15 yrs from now as promised by the pols who have wasted the money. I'd much rather just take the 15% hit that I may have suffered with an investment portfolio than the 50% haircut that SS is going to have to implement. There isn't even a lock box, so quit believing it might possibly have something in it.

2008 Sep 18 09:46 AM

[TBill:]

There is nothing wrong with SS. The bankrupt day is now up to 2046 or so, up from 2028 when they first sounded the alarm. The problem is the Federal Government is bankrupt. The huge SS surplus has been counted as revenue [fraudulant] to keep the deficit looking managable.

So, most likely, you will continue to get your SS, but the Feds will figure out a way to tax it away from you. Clinton went a long way towards that when he made SS payments taxable. Next is a means test.

Even tho the numbers say wait, I'm taking mine at 62.

2008 Sep 18 11:32 AM

[DaveW:]

I thought the VIX in the lower to mid 30's would be a buying opportunity utnil I read Bespokes article yesterday:

seekingalpha.com/artic...

When the VIX closes in the lower 40's I'll start buying.

2008 Sep 18 02:48 PM