Complacency Indicator
If you haven't heard of the technical indicator with the stock market symbol VIX it is now time to pay some attention to it. When the number is running low, as it is now, around 15 to 18 it means everyone is happy and thinks the stock market is going to continue up or at least continue on its current path and there is no need to sell anything. This is a measure of complacency. When the number goes above 35 it means everyone is very nervous and thinks the market is going to fall. It is considered a contrarian indicator.
Wall Street calls this the Volatility Index which disguises its real underlying meaning. What it really should be called is the FEAR and GREED Index.
The average investor buys with a greed motive when the VIX is low and sells only after fear sets in when the number is high because he is afraid of further loss. These are emotional moments and the market is an emotional animal. The truly smart investor has a planned exit strategy before he buys anything; he knows when to sell even before he buys.
Notice that the higher and smoother the movement of the market the more complacent the investors become. The investor becomes overconfident that his stocks will always go up. It is a truism that investors buy with only thoughts of how much they will make and never consider that it is possible to lose. When I was a broker and a member of the exchange I would only keep customers who would place stop-loss orders as soon as they bought something. I always stressed protection of capital.
When you are a serious and reasoning investor you must always think about loss first. If what you buy goes up you don't have to worry. Winning takes care of itself. Losses don't.
As of March 26, 2004 the VIX can now be traded like a stock. If the VIX is currently 18.5 the value of the contract is $18,500 and trades in $10 increments. It can be very volatile; a move from 18 to 38 can make (or lose if you are short) $20,000. This is not for the feint of heart and should be left to the professional speculators.
When you look at the historical charts and run a comparison of both the VIX and the S&P500 Index you will see the inverse correlation. As the S&P goes up the VIX goes down and visa versa.
There are many technical indicators that are used to determine market direction and this is just one of the many. It can be part of your analysis if you are a technician along with moving averages, various ratios and other stratagems.
Whatever you do do NOT become complacent about the money you have invested in your 401K or any other stock market investment. Protection of your capital is always your first consideration.
Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.
Copyright 2005
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
Why Is The Macedonian Stock Exchange Unsuccessful?
The Macedonian Stock Exchange (MSE) is not operating successfully. True, some of the parameters which we use to measure the success of a stock exchange have lately improved in the MSE.
8 Penny Stocks to Avoid
There are many good penny stock investments available, which could turn a small amount of capital into a small fortune very quickly. However, to discover these you need to know what to look for and what to avoid.
Series 7 Exam
What is the Series 7 Exam? If you are looking to become a licensed Stockbroker, you need to know about the Series 7. The Series 7 is a 250 question exam that when passed, licenses you to act as a Registered Representative.
Why Change Funds?
On November 17 I bought 7 different mutual funds and went to a 100% invested position. One of the funds I bought was Robertson Stevens Information Age (RSIFX) and it has made money as have the other six.
Buy and Hold Investment Philosophy
Wall Street has been preaching the doctrine of Buy and Hold forever. The worst part about it is the small investor (and some big ones) actually believe it.
Bargain Basement - Finding Stocks That Go Up
Have you been listening to the talking heads on CNBC-TV? Or those talk radio stock experts? Getting all those good recommendations on what to buy now. Now?Those guys keep telling me the market is oversold.
The Seven Mistakes All Novice Traders Make and How to Correct Them
We learnt the following the hard way! If any of these things applies to you, don't worry - there is an easy solution!MISTAKE ONELack of Knowledge and No PlanIt amazes us that some people expect to trade the stock market successfully without any effort. Yet if they want to take up golf, for example, they will happily take some lessons or at least read a book before heading out onto the course.
Stops Make Money
During the day I watch CNBC-TV, the stock market channel. Fortunately, I keep the sound muted or I would be hollering at the dumb "experts" being interviewed.
How To Make, And Keep, Money Trading Stocks
If you are serious about making and keeping money by trading stocks, then there are three things you need to do, and do well.Money managementOrdersTrading systemMoney managementMoney management comes first.
Buying Stocks and the Importance of Correct Timing
An investor can find and research the best stock on the market, one with huge potential but if the general market indices are negative, it will most likely be the wrong time to buy. A stock with tremendous accelerating earnings, rising sales, an up-trending chart pattern and a strong industry group may sound excellent to buy but will mean absolutely nothing if the market is positioned to move in the opposite direction of your expectations.
Mutual Funds: The Modern Den of Thieves!
Mutual funds were created with the idea that one person can specialize and manage the investments of a large pool of money from multiple investors. Before the great depression mutual funds were called investment pools and mutual fund managers were called pool operators.
Forecasting the Stock Market
Every day I see in the financial section of newspapers how to forecast what the market will do in 6 months, 12 months, several years. "Ten stocks that will double in the next 6 months.
Gold Fever
Right now there doesn't seem to be any "gold fever". Very few are out looking to strike it rich in this sector.
Trend Trading - Trading Stocks Using Technical Analysis and Swing Trading Strategies
Peter is a professional trader, Paul is not. Peter has a tested, proven, written trading plan that he follows each time he enters a trade, Paul does not.
Getting Even
I know there are a lot of you out there who would like to "get even" with the stock market. Many are on the diet of "I hope, I hope".
A Personal Stock Market Investment Philosophy
∙ Make every investment in the stock market a long-term investment.My Mother worked as a teller in a small bank in Dover, New Jersey.
Trading Stocks -Never Forget About A Past Trade
We all know that emotions control every decision that an investor makes in any type of money related vehicle. Whether is be the stock market, real estate, art work or antiques, emotions ultimately set the final price on both sides of the transaction.
9 Deadly Trading Mistakes!
The following are a list of nine things you want to avoid at all costs. Anyone of them can literally destroy your financial dreams and goals!1.
Market Timing?
The recent criminal fiasco in the mutual fund industry is being used by Wall Street to persuade investors that market timing is a bad thing. The late trading by Janus, Bank America and several other well known mutual funds is falsely being called market timing.
Understanding the Bulls and the Bears
If you've ever flipped on the television to CNN Financial or paged through the finance section of your local newspaper, you may have seen or heard references made to "the bulls and the bears." If you didn't know what was meant by those terms, you're about to find out.