Continued Volatility Means Stay Vigilant

Volatility continues to be the key characteristic of the current market. After declining below 11,000 to 10,731 on July 15, the blue-chip DOW made a strong bounce and rallied 10% in six sessions. This was driven by renewed optimism towards the economy and the fact that stocks were technically oversold. The buying enthusiasm was short-lived and not sustainable, as the DOW has fallen back to the low to mid-11,000 range.

Technically, an indicator that I like to use is the option volatility indices developed by the CBOE (i.e. the NASDAQ Volatility Index). The indicator is a barometer of near-term market volatility based on index option prices and is generally viewed as a contrarian indicator. A high VXN indicates maximum fear and a possible market bottom. A low VXN indicates reduced apprehension and a possible market top.

In the technology area, the CBOE NASDAQ Volatility Index, or VXN, which is based on NASDAQ 100 index option prices, has been on the decline over the last few weeks, which could be indicating a near-term top on the NASDAQ. Likewise, in the broader market, the CBOE S&P 500 Volatility Index, or VIX, which is based on S&P 500 index option prices, has also been declining, and indicates a near-term top.

The intraday swings that are more prevalent in everyday trading are driven by news, with the direction depending on whether it is positive or negative. The action of the current trading suggest continued nervousness on the part of investors, while day and swing traders try to make money betting on which way the market is going.

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As an investor, especially one of those who are passive towards portfolio management, it is not a time to be relaxed, as the inherent risk is causing wild market swings and declining share prices. Try to be more active in monitoring your holdings. This is not a buy and hold market.