Monday, December 27, 2004


VOX--MUCH TO DO ABOUT NOTHING? (click on image to enlarge)Posted by Hello

One of the CNBC anchors has recently expressed concern about the complacency in the market as evidenced by the VOX index. This concern was echoed in "THE BIG PICTURE" blog that I enjoy.

The VOX is followed by active traders and is an indication of option activity. Most folks use it as a contrarian indicator. When the activity hits a high level, traders assume speculators have pushed the market too high. Study the charts above and chart below and you will see that the peaks in the VOX correlate well to inflexion points in the S&P 500. On the other hand, note that the market does not change direction near the bottoms or there is al least less correlation to the timing of moves.

In my experience, really good active traders are right only about 50% of the time and make money only because they hold winners longer than losers. For most investors, active trading is a futile enterprise. We simply do not have time to watch every indicator and it is easy to get eaten alive by excessive brokerage commissions and taxes.

When the index zooms to an extremely high level, I do pay heed! However, a low level of activity can easily be interpreted incorrectly. Notice that the index was at an extreme low in January 1995 and notice that the S&P 500 did extremely well in the years following this extreme low.

I seek to hold stocks for an average of 4 years or more and I like to cut my losers short. To reach my average, I must hold some stocks for 10 years or more. The next recession will be a real estate recession and real estate recessions are typically pretty rough (1973-74 and 1990-91). The next one should occur in about 5 years. In the mean-time, many stocks will do well.

You and I should focus on finding several good stocks to own for the next several years. We do not need to worry about how excited the option traders are at any given moment. They can be super bears and super bulls within the same few months or even weeks.

Today, the price of oil and the US dollar plunged while interest rates increased. In recent weeks, each decline in oil has been paralled by a rise in the market. Today, the increase in rates and the decline in XOM and other oils were a drag on the market. Airlines have been soaring with each decline in oil but the debacles during the holidays did not help the airlines. Still, CAL was up again today and I am up about 50% in just a few weeks. I am breaking even on the DAL purchased a week or so ago. I added to AMZN only a few weeks ago and today AMZN was a top performer, up about 9%. On-line retail sales are growing at 25%+ per year!

Corporations have $650 billion in cash on their balance sheets. Stock buy-backs and take-overs permeates every industry. Tomorrow the tender for Peoplesoft will go through giving my accounts cash to invest. I have several stocks in mind. The point is that I intend to re-invest quickly. I want to own another stock before that company or another company decides to buy the stock.

In the past several months, my accounts have had several take-overs. These all occurred while the VOX was low and falling lower. I simply cannot sit around worrying about the lack of volatility in the options market. The time to make money is always during a time when folks are worried about something. The concerns about the VOX are MUCH TO DO ABOUT NOTHING!