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The VIX Turns 40- Again

If you're watching CNBC, you're hearing a lot about the VIX. Do you know what the VIX is? It's an index that measures the amount of fear there is in the market.

VIX stands for "Volatility Index". The VIX is compiled by the Chicago Board of Options Exchange, and they come up with the number by using a complex formula of comparing activity in calls and puts.

As we all know, the markets have gone berserk to the downside today. In fact, all the major equity indexes have been selling off for the last several weeks- ever since the Standard and Poors rating agency put US Treasuries on credit watch.

Having been an observer of the markets over the past 23 years, and having been a follower of the VIX for about 15 years now, I've learned to let the VIX help me identify when we're at or near some sort of market bottom in a gigantic blow off like we're experiencing.

Here's a tried and true rule of thumb that has worked everytime for the past 23 years- except for 2008. Everytime the VIX hits around the 40 level, it represents an excessive level of fear that generally leads to some sort of market rebound.

I know the market has become irrational in the last two weeks, but it sure doesn't feel in 2008 to me. Maybe I'm wrong- maybe this will get to be as ugly as 2008 all over again.

However, in 2008 we were facing the prospect of a total collapse of our entire financial system combined with a complete melt down in the residential real estate market and massive home foreclosures out in the future.

We've succeeded in partial deleveraging- meaning Americans in general don't have as much easy money debt as they had in 2008. There have been mass foreclosures, and the banks and Americans have taken the appropriate write downs.

The only thing left that needs truly major deleveraging is the United States Government's balance sheet which simply has too much debt for Wall Street and obviously for S&P's AAA credit rating.

Amongst many other global reasons, the market is expressing its dissastisfaction with the inablitiy of our elected officials to come up with a workable plan after many months of wrangling.

There's an old market adage (amongst millions of them): Earnings Don't Matter Until they Matter- and right now, earnings and corporate performance of any kind simply doesn't matter. It's all being overshadowed by macro events.

Nevertheless, after a blow out like today, earnings might matter tommorrow when some investors go bottom fishing and short sellers star to cover.

Here's a chart comparing the VIX to the S&P 500:

This chart is a bit complicated, and I could have stretched it back a bit further. What you are looking at is a chart of the VIX pictured in Red, laid on top of a chart of the S&P 500, shown in Black.

The VIX peaked today at 47.08, a level reflecting extreme fear in the markets. Notice how the S&P 500 and the VIX meet at the extremes. This happened last in March of '08 which turned out to be a major market bottom.

I'm nowhere near ready to say the market will bounce. I'm no where near qualified to predict it. However, it seems to me it's likely there's more risk on the short side than the long side with this kind of market blow off.

The best advice I heard in the last few days was to simply remain calm and wait for the hurricane to pass. Then, you can clean up the rubble.

If you are interested in bottom fishing, it seems to me there's a lot of great bounce back opportunies.

If you really want to go nuts, etf BGU is supposed to represent being triple long the S&P 500- it really doesn't over the long term, but can be a good trading vehicle for a short term trade. Bank of America (BAC)has been villified by the media- that might be worth looking at under $7.

Those are just ideas and these are some observations. If you want to throw out some poker chips, there's been six days of huge down volume. They'll be running out of stock to sell soon.

Back To Mars

Last week I alluded to a new idea for a company that will help feed people when we finally get around to colonizing Mars. It's a bit tongue in cheek, but this company is great at helping people grow stuff better.

Naturally, the idea is on hold until the madness is over. This is one of the thinly traded ones that can be really volatile.

And, speaking of thinly traded ideas, do you remember Midas Medici (MMED)? The company completed another acquisition which now brings their annual revenue run rate to over $80 million. The stock had its highest volume day ever today, trading nearly 30,000 shares.

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