October 20, 2003

IT Investor's Journal - Market Volatility Levels and The Potential For a Correction

On Wednesday, the CBOE Volatility Index (VIX) hit a new 52-week low. This
suggested to me, and a bunch of folks I know in the business, that a sell off (of
unknown magnitude) could be possible, and potentially imminent. One factor
mitigating the downside of a market correction is the ongoing and apparently
insatiable institutional appetite for stocks. Performance anxiety and
institutional buying could well continue to the year-end and keep a floor under any
correction. One friend of mine believes that we could see some sort of a modest
correction (say, 5-10% downside from current levels) starting over the next 30
days.Interestingly, after the VIX hit this 52-week low on Wednesday, the market
did correct back a little on Friday. The S&P 500 Index and the Nasdaq Composite
Index closed Thursday at around 1,050.07 (an important technical level) and
around 1,950 respectively. Both indexes sold off a little Friday, the S&P down
around 1%, the Nasdaq down a little over 1.9%, to close at around 1,039 and
around 1,912 respectively.

That said, I've observed over the last few years that the market can stay
overbought for substantially longer than it can stay oversold. In addition,
the market can stay complacent longer than it can remain fearful. My
point is that a low VIX and a huge overbought reading is not the inverse of a
high VIX and an oversold situation. Having said all that, I do think that there
is more risk in being long here than being 1) on the sidelines or 2) short.
For example, look at the trading in INTC, on Wednesday. It's not the news that
matters, but how the market reacts to the news. The trading reaction in INTC
was kind of the reverse of the reaction on April 16, when the stock (and the
tech stocks in general, actually) ignited the broader market for the next 6
months on the news of stronger guidance from Intel and Microsoft.

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