Don't Be Afraid of the "Fear Index"

The Penny Sleuth Features: Penny Stocks, Options and High-Growth Opportunities! Don’t Be Afraid of the “Fear Index” By Jonas Elmerraji February 1, 2011 Dear Penny Sleuther, The market’s “Fear Index” rallied hard on Friday, leading some to question whether 2011 is going to be another banner year for volatility. But for traders, an upswing in volatility and fear is actually a good thing — here’s a more in-depth look at the VIX, and how you can use this “Fear Index” to your benefit in the coming year. Before 2008, the VIX wasn’t a household name for most retail investors. But as the index, which measures the implied volatility of the S&P 500 index, rose to new highs amid the crumbling stock market, this unique index got more than its fair share of attention. That said, ask even the most fervent market observers what the VIX really is, and you can expect answers to diverge a bit… 6 Penny Stocks to Own Right Now… Penny Stock Fortunes is giving away SIX penny stock recommendations to all new subscribers! But you must hurry because these plays could explode at any time. Click here to watch the presentation now. So, what exactly is the VIX? The VIX’s full name is the CBOE Volatility Index. Essentially, this measure of volatility was created in 1993 for the Chicago Board Options Exchange (CBOE) by then Duke University Professor Robert Whaley to represent the market’s expectation of market volatility for the next 30 days. Simply put, the VIX is a good indicator of just how much investors can expect prices in stocks to swing. A higher number means bigger moves (both up and down), whereas a smaller number indicates smoother sailing ahead… But the VIX is actually designed to tell us much more than that — the value of the VIX is actually significant too. It tells us the expected movement of the S&P on a percentage-point basis. Let me explain… As I write this, the VIX sits at 19.46. That number is the expected annualized price movement of the S&P 500 in the next 30-days. By digging up a bit of finance class math, that tells us that right now investors are expecting the S&P to move 5.48% (either up or down) in the next 30-days. Although that’s a potentially large percentage move, it’s still far from game changing volatility. Exposed! How Wall Street’s Breaking the Rules... Wall Street is secretly breaking the rules, and making a mint! Now you can too — it’s 100% legal — and could have already bagged you $123,850! Skeptical? Curious? Then simply click here right now to find out more. That said, there’s another element of the VIX to look at — where it’s headed: Taking a look at the chart above, a few things are clear about the VIX’s price action. For starters, the index has been trading in a downtrending channel. And for another thing, it looks like the VIX is finally finding support near its 52-week low of 15.23. With Friday’s test of channel resistance, a change of trend could be underway for the VIX. For traders, that could be a very big deal — especially if volatility moves back toward previous highs: In May, the VIX hit a near-term high of 48.2, which suggests expected single-month moves of 13.9% in the S&P 500… That’s major volatility. In October 2008, the VIX hit a blistering all-time high of 96.4. That means that the markets were pricing in monthly expected volatility of 27.8%! From a technical perspective, every time the VIX has tested support in the low 15 range (weekly), the index has bounced back significantly higher. Since the last few weeks have been another retest of 15 (see the chart above), that’s indicative that higher volatility may come back into play. If that’s the case, it’s going to be crucial to wait for a broad trend in the S&P 500 and Dow before jumping into stocks. Remember, the VIX indicates movement in either direction, so unless an uptrend is defined, stocks can just as easily move lower. Obviously, this is a theme we’ll be keeping a close eye on in 2011… Cheers, Jonas Elmerraji P.S.: As I write, the S&P 500 has average returns of just under 2% so-far in 2011, while my Penny Momentum Trader readers have averaged gains of just under 10%. As volatility continues to creep up, I expect our performance to beat the S&P by an even bigger clip. How do we do it? By breaking the rules, of course. To learn exactly how my technical-driven trading strategy works, just click here… Retire Off This One Penny Stock? All of your retirement woes could be lifted thanks to this one penny stock’s massive resource discovery... You could quickly turn $25,000 into a whopping $2,142,500... no matter how the market moves! But you must hurry before Wall Street catches wind of it... Expert geologist Byron King reveals the full details in his new presentation — here. Don’t Be Afraid of the “Fear Index” is featured at Penny Sleuth. The Secret $200 Retirement Blueprint Investing in Penny Stocks What Is Technical Trading Follow the Penny Sleuth on Twitter, here. Become a Facebook Fan of The Penny Sleuth, here. The Penny Sleuth, a free e-letter, offers independent news and commentary on small cap stocks, options and high growth opportunities. We sent this e-mail to KNUMASSCN@gmail.com because you or someone using your e-mail address subscribed to this service. Are you having trouble receiving your Penny Sleuth? You can ensure its arrival in your mailbox by: Whitelisting Penny Sleuth. 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