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Wednesday, January 23, 2008
Are the stock markets oversold?
With the markets around the world dropping substantially on Jan 21 and Jan 22, the SmartMoney article discusses if the markets may be oversold based on the value of the options volatility index, VIX.
Known by some as the "fear index," the Chicago Board Options Exchange's Volatility Index surged nearly 40% at its peak to a new 52-week high of 37.57. The all-time high for the volatility index as it's currently calculated was near 46 during the Russian debt and Long-Term Capital Management crises of a decade ago, an anxiety level nearly matched after 9/11 and again at next year's bear-market lows.
The VIX, which is based on the real-time S&P 500 index option prices, is considered by many investors/traders to be an indicator of the fear or optimism of the investors. A higher value of the index indicates fear or nervousness among investors which in turn may indicate that the market may be reaching bottom as there is generally an extreme pessimism about companies' future earnings causing most investors to sell their holdings.
Steven Roge, a portfolio manager at wealth-management firm R.W. Roge in Bohemia, N.Y., says now is the time for long-term investors to initiate or add to positions in companies with strong fundamentals.

"A level this high for the VIX signals that there is absolutely capitulation in the market and stocks have oversold," Roge says. "Nobody is trading on fundamentals, they're trading on fear. If you stick with stocks that are well-managed and well-capitalized, you're going to end up owning really good franchises at levels that weren't possible just a few months ago." Roge believes the markets could fall at most another 10%, but "we're trading close to a bottom."
Of course, as always, different investment professionals differ in their opinions regarding whether we have reached the bottom yet. Some investors have taken wait-an-see attitude to see if the prices will fall further before jumping in.
Steve Wolf, managing director at asset-management firm Source Capital Group in Westport, Conn., says the VIX's rally on Tuesday was a reflection of a "multitude of fear factors" swirling through the markets. He's adopted a wait-and-see pose.

"We need to see more than this morning to determine if we're going into a sustained downtrend," Wolf says. "It's far too early to tell whether this market is in effect bottoming out."
For complete article, see:

SmartMoney.com: VIX Flashes Fear, Nurtures Hope

For related articles, see:

FT.com: Wall Street: A time to tread more carefully

The Wall Street Journal: Four at Four: The Market Plays Tricks


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posted by Ruby @ 4:56 AM  
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