Posts Tagged ‘Investing’

What is the VIX?

Wednesday, October 29th, 2008

The VIX is a measure of market risk, sometimes called the fear index.  It is used to gauge investor sentiment – whether the broad stock market in the United States is bullish or bearish.  VIX actually stands for volatility index.  it is the ticker symbol for one of the volatility indexes created by the Chicago Board Options Exchange (the “CBOE”).  In fact, the VIX is the most widely used volatility index, and was introduced by Duke University Professor Dr. Robert Whalley in 1993.

Volatility is the fluctuation in the market price of an underlying security.  The VIX measures market expectations of near-term volatility conveyed by S&P500 near-term options prices.  Specfically, the VIX presently is calculated by measuring the volatility of out-of-the-money put and call options on S&P500 stocks for the two nearest expiration months.  It anticipates the volatility of the S&P500 over the next 30 days.  A VIX of 30 means, roughly, that over the next 30-day period, the S&P500 will move 30% on an annualized basis (i.e., more info

8.66% over the next 30 days).

Typically, the VIX is inversely related to market tops and bottoms.  For example, a high VIX implies pessimism and usually means a market is bottoming.  Low values imply optimism.  However, using the VIX solely to determine a market bottom or top doesn’t work because the method isn’t foolproof.  However, there’s no cap on how high the VIX can go.  Historically, a VIX reading of 30 has been a high number. but the VIX has traded over 70 in October, 2008.   Consequently, It should not be used in a vacuum, but is best used with other indicators in order to provide investment guidance.

On March 26, 2004, the CBOE began offering futures contracts on the VIX for trading.  On February 24, 2006, the CBE listed options on the VIX for trading.

VIX and More is a blog that follows the VIX.  Volatility Trading is a new book with a CD-ROM on trading the VIX.

Inflation and Hard Assets

Sunday, September 7th, 2008

We’ve had many years of low inflation in the United States.  In the past year, however, inflation has increased.  The U.S. economy is complex and many reasons are behind this acceleration.  For example, the industrialization of the economies of China and India have increased the demand for commodities, which are used to build infrastructure.  So the prices of commodities, such as steel and oil, have risen as demand has increased globally.

The law of unintended consequences also has played a part in inflation.  Congress passed and President Bush signed the Energy Independence and Security Act, which mandated a huge boost in the use of corn-based ethanol.  This occurred at a time when world grain stocks are at a 30-year low and prices at historic highs.  With more demand for corn, prices shot up.  Livestock producers and food processors incurred greater costs, as corn is a staple of livestock feed.  As a result, the cost of food rose and now, for example, eggs cost 40% more than they did a year ago.  In fact, even the prices for non-food crops rose as farmers switched from them to grain crops, which are more lucrative.

So what holds value during inflationary times?  Hard assets typically do.  One such hedge against inflation  is real estate.  Despite the housing downturn due to the subprime crisis and resultant credit crunch, real estate historically has been a good long-term investment when inflation accelerates.  Although the market is not at its peak, we haven’t seen a decline in U.S. commercial real estate comparable to the residential slump.  Good value may lie in commercial real estate investment over the next few years.

China and India Follow up – Investment and Economic Ramifications

Thursday, July 10th, 2008

A month ago, I wrote about the emergence of China and India in the world economy.  Their expansive growth, though, results in their being more greatly affected by global economic trends.  As Investor’s Business Daily notes in U.S. Slowdown Shows In Drop of China ETFs, lower consumer confidence and drops in spending among American consumers has hurt Chinese economic growth.  That’s because the U.S. is the largest export market for Chinese goods.

Technical analyst Michael Kahn, in his Barron’s column, What Happened to China and India?, states that both countries are in bear markets.  While the long-term fundamental stories are sound, there’s no technical reason to expect a recovery in the Shanghai “A” share index, the Bombay Sensex index or the iShares FTSE / Xinhua China 25 Index Fund (FXI) anytime soon.  The latter is a popular ETF that mirrors an index of the largest 25 Chinese mainland companies traded on the Hong Kong Stock exchange.  More information is available on the FTSE / Xinhua website.

Charting Publicly-Traded Securities

Saturday, May 31st, 2008

A great many resources exist for accessing information about securities that are publicly-traded. These securities can range from corporate equity to government debt to commodities futures. In general, if there is a public market, then a chart can be developed to track various aspects of a security.

Charting allows one to technically analyze different patterns in the security’s value and to attempt to predict what future patterns-and valuation-may occur. This is useful for everything from, for example, personal investment analysis and research to corporate due diligence and industry analysis for potential merger candidates.

Quite a number of charts allow you to customize parameters that include timeline, volume, comparison to competitors or benchmark indices, stock splits, dividend payouts, and the addition of various technical indicators.

Some useful websites that offer free charting, among other information, include:

* Finviz – This site offers a wealth of information, including a heatmap of the daily performance of individual equities and market sectors.

* BigCharts – Big Charts is one of the major charting engines and allows for easy customization.

* ClearStation – ClearStation is another site that provides a lot of information.

* StockCharts – StockCharts allows for a great deal of customization.

* Yahoo Finance – This very popular investment site has simple interactive charting options.

* Google Finance – Google has developed an interactive chart that allows you to drag the chart to quickly change time lines.

* MSN Money – These charts are easy-to-use and have good, simple explanations on changing chart parameters.

* Quote.com – This is another easy-to-use chart.

* Ask Research – Ask Research also allows for detailed customization of parameters.

Fundamental and Technical Analysis

Sunday, March 2nd, 2008

Two analytical models exist to determine the appropriate price of an equity security.

Fundamental analysis focuses on analyzing a company’s financial statements and condition, its management, and its markets and competitive position.

Technical analysis focuses on studying a company’s market action via the supply of and demand for its securities in order to estimate future price trends. Michael Kahn writes for Barron’s Magazine and has an excellent blog, Behind the Headlines, that concentrates on the techinical analysis of securities and markets.