Is a Major Sell Off in Stock Market During 2010 Coming?

An article by pgupta    1 Comment

The stock market has been fairing relatively well lately with a 52-week high being reached and many investors hoping that the bad times of the recession are over. However, if one looks at the Volatility Index, there may be some worries as to what is going to happen in the future. Is a stock sell-off coming? I tend to think its possible with a hope that it does not happen. I personally have close to 20,000$ invested in the market currently in various stocks.

Are we experiencing Pre-shocks of a major Earth Quake?

Everyone can rejoice, the stock market is on a 52-week high and everyone is feeling that things are going to be better and the recession is fading into the past. Of course, the Volatility Index (VIX) is at a 52-week low. What does this mean exactly? Isn’t it good when the stock market is high and volatility is low? Well, according to some economists it is actually something to worry about. The problem here is that when the stock market is doing well and investors have more confidence in it, the Volatility Index goes down. Now, the VIX is way down, and when the VIX is way down, it has a habit of reversing unexpectedly. On VIX option-expiration dates, there is always a risk of it reversing and we just passed one of the option-expiration dates. In addition, over the last five VIX option-expiration dates, the VIX has spiked up sharply after the expiration. When the volatility spikes, it means a drop in the market and in every case in the past five VIX option-expiration, the market has dropped! Now face that face and be ready for a shakeout.

In the October expiration, November call options were more expensive than the puts. When the November options expired, the December call options were more expensive than the puts, and so on. We just had an option-expiration date, and in this case the market did the exact same thing. In fact, calls were 11 times more expensive than puts, with the VIX April 17 put options coming in at $0.30 and the VIX April 17 call options costing $3.30.

This has many economists worrying that there is going to be a very sharp increase in the volatility of the market and that will cause stocks to go down, way down. The obvious question is when is the reversal going to happen? There is no way to tell but there is the chance for a reversal at any time and many investors need to be prepared for a change in the market.

When will the sell-off start?

Will a sell-off be coming soon? Will the reversal happen within a week, month or quarter? There is no way to tell but it is important to remember that this does not mean a sell-off is coming. It just means that the risk of sell-off is greater. Remember to be wary because the market is still volatile, just not as volatile as it once was.

Further Reading:

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