Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
Trump Puts North Korea Nuclear WAR Back on Track as Plans for Nobel Peace Prize Evaporate - 25th May 18
Insane EU GDPR SCAM Triggers Mass Email Spam Attacks! - 24th May 18
Stock Market Higher Again, but Still No Breakout - 24th May 18
Study: Slowing Global Economic Growth IS NOT Bearish for U.S. Stocks - 24th May 18
What if This Week’s Rally in Gold is Already Over? - 24th May 18
EUR/USD – Reward for Bears - 24th May 18
5 Terrible Trading Mistakes That Rookie Investors Keep Making - 24th May 18
More Clarity for the Short Term for Bitcoin Price - 22nd May 18
Study: A Rising and Strong U.S. Dollar Isn’t Consistently Bearish for the Stock Market - 22nd May 18
Gold, Silver & US Dollar Updates with Review of Latest COTS - 22nd May 18
Upside DOW Stock Market Breakout May Be Just the Beginning - 22nd May 18
5 Reasons Why Forex Trading Is Becoming Such A Big Deal In SA - 22nd May 18
Fibonacci And Elliot Wave Predict Stock Market Breakout Highs - 21st May 18
Stock Market Ideal Cycle Low Near - 21st May 18
5 Effects Of Currency Fluctuations On The Economy - 21st May 18
Financial Conditions are Still too Easy for the Stocks Bull Market to End - 21st May 18
US Stock Market Elliott Wave Predictions for 2018 and Beyond - 20th May 18
Are You Still Fearful of Cryptos? - 20th May 18
US Stocks - Why I am Short-term Bearish, Medium-term Bullish - 20th May 18
Looking for a Turn in Gold Price - 20th May 18
GDX Gold Mining Stock Fundamentals 2018 - 19th May 18
Semiconductor Stock Market Canaries: Chirp, Warble… Soon a Croak and Silence? - 19th May 18
Three Drivers of Gold Price - 18th May 18
Gold Market in First Tertile of 2018 - 18th May 18
What Happens Next When Small Cap (Russell) Leads the Stock Market - 17th May 18
Negative Signs for EUR/USD? AUD/USD - Battle - 17th May 18
DOW Jones and CRUDE Oil on a Cliff Edge, Waiting for a Nudge! - 17th May 18
Gold Price No More Subtleness – It’s Show Time! - 17th May 18
VIX Cycles Point to Stock Market Correction - 17th May 18

Market Oracle FREE Newsletter

Trading Lessons

Stock Market Volatility Index Funny Business

Stock-Markets / Stock Markets 2016 Jan 29, 2016 - 08:49 PM GMT

By: Barry_M_Ferguson

Stock-Markets

The volatility index, or the VIX, is commonly thought to be an index that gauges index volatility. Actually, the VIX is an index that gauges the expense of put options. Put options of course are designed to gain advantage when the underlying asset declines in price. In this case, the VIX is a measure of the expense of buying put options on the S&P 500 index. Normally, prices are set by buyers and sellers. More buyers than sellers generally leads to higher prices and fewer buyers than sellers generally leads to lower prices. Normally.


But we aren’t in Kansas anymore. There is also a ratio that we can follow comparing puts and calls. This is the ‘put-call ratio’. A ratio of ‘1’ would indicate that there are an even number of puts and calls sold on a given day. Less than one indicates more ‘call’ buyers and a ratio above one indicates more ‘put’ buyers. The price should of course follow. Unless, there is some funny business going on in the options carnival.

Let’s look at a 3 month chart of the S&P 500 in gold, the VIX in black, and the ‘put call ratio’ in red all on the chart below. Clearly this is a very short term chart (3 months) but we can see that the price of options (VIX) pretty well mirrors the ratio of puts and calls sold. That seems logical.

However, something funny is going on. Not in a humorous way but in a fraudulent way. Typically, and logically, when the S&P 500 index sells off, put options are a popular way for investors to protect against further downside risk. Thus, when the stock index falls, the put-call ratio increases and so too does the price of those put options (VIX).

But look what happened in January of 2016. Stocks sold off immediately due to the Federal Reserve’s respite from daily stock price support in Q4 of 2015. As the Fed usually takes the first few weeks of January off, asset prices decline. Who could predict that? Our logic so far is working. Down went the S&P index. Up went the VIX and the put-call ratio (as represented by CPCE or the red line). Then things got a little funny in the third week of January.

The S&P index sold off some 8% or so in the first two weeks of the month. Right on cue, our VIX, or the price of put options, went up. However, the put call ratio fell right along with the stock index. As stocks tanked, more call options were sold than put options. Yet, put options increased in price? Yes, notice the divergence of the red line and the black line.

Thus we must ask the question. Who has been buying all these call options while faced with a declining stock index?

Given central bankers everywhere are propping up stock indices, or trying to mute the decline of stock indices, should we assume the Federal Reserve Bank is at work in the shadows? See the chart below. Notice the funny business from the 19th of January to the present. Wouldn’t it be nice to be free from central banker dominance? What we do know is the red line and the black line will soon get back together. Or, if the stock indices resume their bearish trend, the central bankers will have to let them by refraining from call option purchases. And, just as predictable, when a stock index is down hard in the first few weeks of the month, there is always a rally at the end of the month. Why? Investors get a monthly statement and the central banksters don’t want investors to get discouraged. So, they escalate the balloon. See the chart for funny business at work. 

Chart courtesy StockCharts.com

Barry M. Ferguson, RFC
President, BMF Investments, Inc.
Primary Tel: 704.563.2960
Other Tel: 866.264.4980
Industry: Investment Advisory
barry@bmfinvest.com
www.bmfinvest.com
www.bmfinvest.blogspot.com

Barry M. Ferguson, RFC is President and founder of BMF Investments, Inc. - a fee-based Investment Advisor in Charlotte, NC. He manages several different portfolios that are designed to be market driven and actively managed. Barry shares his unique perspective through his irreverent and very popular newsletter, Barry’s Bulls, authored the book, Navigating the Mind Fields of Investing Money, lectures on investing, and contributes investment articles to various professional publications. He is a member of the International Association of Registered Financial Consultants, the International Speakers Network, and was presented with the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services in 2009.

© 2016 Copyright BMF Investments, Inc. - All Rights Reserved
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules