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Dr. Kris has two degrees from MIT because one just wasn't enough. Her life goal was to figure out the universe and having done that (at least to her satisfaction), she decided to tackle something even more difficult—the stock market. Applying the scientific method along with an insatiably... More
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  • Market Notes: Take Advantage Of Low Volatility In A Frothy Market -- June19 0 comments
    Jun 19, 2014 4:49 PM

    Today the volatility index (VIX) hit a seven year, pre-recession low. A very low VIX is a contrarian indicator, but that doesn't necessarily mean that the market is going to reverse tomorrow. Historically, the VIX can stay low for weeks to months but at some point, it will reverse and when that happens, the market will begin moving to the downside. The biggest problem with the markets is always one of timing, and the more indications we get showing that the market is nearing a top, the better.

    One indication that the market may be getting toppy is to take a look at the stocks populating the New Highs list: consumer staples (tobacco, household products, beverage makers), utilities, and commodities (look at today's jump in gold and silver). This rotation into the more defensive sectors is a sign that investors think a top is near and are repositioning their portfolios into the safer areas.

    Another indication is to consider market valuations. The price/earning ratio (P/E) of the S&P 500 currently stands at 19.56. That's roughly 25% above its historical average. Now, markets can stay over-valued for a while but eventually the pendulum will swing back in the other direction. I look at hundreds of stocks a day and I'm telling you, that there are very few bargains left out there (other than highly speculative stocks such as biotechs). Nobody likes to pay more than the retail price of something, and this holds true for investors, too. When there are no more bargains to be had is when the buying pressure will dry up--and that will be the day the market begins to roll over.

    The list of reasons why the market may be nearing a top is growing, and it would be wise for long-term investors to consider buying long-term put protection for their portfolios such as LEAP puts on index tracking stocks (DIA, SPY, QQQ). This low volatility environment means that options are cheap--like buying insurance at a discount. If you're looking for the real bargain in today's market, long-term put options are it.

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