That’s why I love the CBOE Volatility Index ($VIX). The VIX is a measure of various S&P 500 index options.

So when the VIX moves up, it means more people are making bearish bets, and usually the stock market drops.

Right now, the VIX is not only moving down, but confirming a downtrend.

As you can see from the chart above, 40 has been a very important support point over the past year for the VIX.

It hit 40 once at the beginning of the year, once before February and once again in the middle of March. Each time, the VIX would move higher and the stock market would push lower.

But three weeks ago that all changed. The VIX managed to break under 40 by a significant margin. Then, over the past two weeks it went back to 40 and tested its new found support.

The VIX failed support and headed back down.

This means that the stock market should have more fuel, as far as investor optimism is concerned, to push higher still.

(If you’re unsure what the VIX is, check out this explanation here.)

As you can see in the chart above, the VIX formed a support line at around 40.

This is a very important line because it hasn’t been breached since late September – just after the Lehman fiasco.

Considering the VIX index measures fear, a break under it would symbolize a less fearful and volatile market. And less volatility correlates perfectly with higher stock prices.

So if you want to be extra safe before buying stocks, wait for the VIX to break under 40 before jumping in.

On February 2, I said:

If the VIX is rising, that means the Dow Jones should be falling, possibly breaking under 8,000 sometime in the next few weeks and head towards 7,000.

The play should be obvious. But I’m going to point it out anyways because I’m feeling saucy.

If the Dow Jones drops under 8,000 as the VIX spikes, buy a put on the Diamonds ETF (NYSE:DIA), which is an ETF that tracks the value of the Dow Jones Industrial Average.

As I write, the Dow is trading at 7,140. So if you sold puts on DIA, you’d have made 11% in about 40 days time.

Now is the time to get out of this trade (if you haven’t already).

Why?

On Feb 24, I talked about how “big round numbers” can be huge psychological turning points for the market. I said that 7,000 was one of those turning points because it market a ten-year long resistance line.

Well, 7,000 has been breached, as you can see from the chart above.

The Dow briefly flirted with 6,500 (which was also one of my targets) and then zoomed up right past 7,000 again.

This is pretty freaking bullish. Quite frankly, it gets me really agitated.

No, it’s not because I’ve shorted every stock in the world. It’s because there’s nothing to really get excited about.

It seems that the news, which is being seen as positive, really isn’t.

First, Citigroup says that for the first two months of the year, it made a profit. Man, that’s complete BS if I’ve ever heard it.

Then Bank of America said it won’t be accepting anymore TARP money.

If banks don’t have to count hundreds of billions in toxic asset write downs… of course they’d have a profit (so would most other banks).

So, why would these two banks not count write downs in their estimates?

Maybe mark-to-market accounting rules will be suspended this week. Then the banks won’t have to worry about write downs anymore.

From the Wall Street Journal…

After facing a barrage of criticism Thursday, the chairman of the Financial Accounting Standards Board told a U.S. House panel that he will work to expedite issuing guidance to companies on the application of mark-to-market rules.

The FASB said they’d have it done in three weeks.

If these rules get suspended or relaxed, this market is shooting higher on the back of the financials. Heck, it’s already shooting higher on the mere thought of these rules being relaxed.

Considering the financials were the sector that led the Dow Jones down to its recent lows, it should come as obvious that the financials will lead the Dow Jones higher in the weeks ahead.

Go long the Dow Jones by buying the Diamonds ETF (NYSE:DIA).

7,000 is your stop. But I have a feeling this market is pushing past 8,000 in the weeks ahead, if these rules are relaxed.

But to the people I talk to in the checkout line at the supermarket… at Target… at the gas stations… in bars… don’t seem particularly worried either.

Not anymore than usual, that is.

I even checked the S&P 500 Volatility Index ($VIX).

This is known as the “fear index,” since the more fearful the market is the higher it moves.

What did the VIX tell me?

It said that, although there is some fear out there, it’s nowhere near last November’s levels.

In fact, it’s not even over January’s levels.

Yet here we are.

The Dow has broken UNDER its November lows (as I predicted it would here and here).

And the market isn’t even in a panic.

This means that the Dow Jones is likely to fall further and the S&P and Nasdaq should follow.

That’s because true market bottoms don’t happen unless there’s a lot of fear. Everyone has to be sick of stocks to never want to invest in them again.

And that’s simply not the case today.

So until the VIX back to it November levels, you can expect the market to keep dropping.

My target range is 6,750 to 6,500 (since this is a small percentage move from where the Dow is now, options are the best way to play it and make a substantial profit).

The trade of the year continues to be the trade of the year: bet on falling stocks and make big bucks.

I’ve been calling for a drop in the Dow since the beginning of the month.

Back on February 2, I told readers this: “If the VIX is rising, that means the Dow should be falling, possibly breaking under 8,000 sometime in the next few weeks and heading towards 7,000.”

And Crisis Strategy Alert, a new crisis investing service (published by the same guys who put together ContrarianProfits.com), has helped our subscribers make 20% profits on the Dow’s slide. (They are still banking coin!)

But is the Dow going to keep dropping? Let’s take a look…

This is a 12-year monthly chart of the Dow Jones Industrial Average (DJIA).

Notice how steep the most recent fall was.

Also notice how the DJIA recently broke under its 2002 bear market lows.

That means had you invested in a Dow Jones index fund back in 1998 your account would have LOST MONEY after inflation.

That makes this one of the worst investments known to man.

And it doesn’t seem like the pain will end anytime soon.

Above you’ll see that 7,000 is a major psychological support point.

Why?

Because it’s a round number. And because the DJIA has traded close to that level in the past.

Today the DJIA is about 100 points away from this mark.

So here’s what I suggest you do.

If you’re already short the Dow via an ETF like the Diamonds Trust (NYSE:DIA), then hold onto your position.

If you have not yet entered into a short position, then wait for the Dow to break under 7,000 before getting involved.

The equities market are taking Geithner’s proposal as kindly as flatulence at a funeral. It may be bad news for some investors, but gold bugs love it.

Gold bugs are finally getting the fuel they need to get the price of their precious metal out of the rut it has fallen into.

With the Treasury’s latest banking-industry bailout going over like flatulence at a funeral, more and more investors are turning to the safety of gold. It has been the one asset class Washington has not been able to grossly manipulate… so far.

As I write, the price of an ounce of gold is trading for $914 an ounce, $21 higher than yesterday’s final price. As the market’s tank and volatility increases (just look at the VIX) for what seems like the nine hundredth time this year, investors are looking towards gold with a glistening eye.

Now that Obama is proving he and his team are not the overnight saviors so many voters thought they would be, gold demand is likely to continue its climb. In fact, most analysts expect gold demand to surge beyond 2007 levels this year.

If the precious metal climbed from $600 to nearly $1,000 in 2007, imagine what it could do this year.

We are just over a month into the New Year and already we have plenty of indications of what is to come. The U.S. Mint revealed this week that it sold over 92,000 ounces of its American Eagle coin in January. That adds up to more than four times what it sold during the same time last year.

Even more intriguing for gold bugsis the news trickling out of the gold ETF industry. It just announced that gold inflows increased to 1,317 tons last month, a record surge of 105 tons. That is a lot of gold. It proves investors are searching for safety and appreciation potential.

A golden opportunity

As always, you have several options if you want to take advantage of the bullish sentiment. You can take physical possession of a slab of gold in the form of bullion or gold coins.

But if you live in a rough neighborhood or don’t trust your mother-in-law, you may want to purchase shares of a gold-backed ETF like SPDR Gold Shares (NYSE:GLD). They are less prone to thievery.

Today’s action on the equities market is a good example of the portfolio-protecting abilities of gold. As I write, the S&P 500 is down by 3.68%, but the above-mentioned ETF is up by over 1.5%.

Some gold experts are calling for gold prices to hit $2,500 or even $3,000 by the end of this financial meltdown, but I am much more conservative. The figure is likely to top out at $1,500. That is a 60% gain from today’s prices. Not bad when the rest of the market’s are too afraid to move.

Gold may not be the sexiest or most thrilling investment out there. But we don’t invest to entertain ourselves. When the markets go haywire, you need to take action to protect what you have earned.

Now may be the last time to do it while prices are so cheap.

Source: Gold is getting sexier by the minute

No, I didn’t alter my genes to gain an unnaturally strong sense of smell. And no, I can’t really lock my jaws like a Pit Bull. I just look at the S&P 500 Volatility Index (VIX) and everything becomes clear.

What Is the VIX?

The VIX is a basic measure for volatility in the market. Higher levels of volatility in the market coincide with higher levels of fear. Higher levels of fear usually mean investors will pull money out of the markets and you see an overall drop in market value. So when you see the VIX rising, the market usually drops.

How Do You Use the VIX?

The best way to use it is as a tool to supplement your existing technical analysis.

Let’s say the market takes a huge drop one day. How do you know that this is the beginning of a genuine leg down? Sometimes it can be hard to tell. But if you look for a major technical break in the VIX to occur around the same time, the odds of you being right about that drop increase substantially.

A Major Opportunity in the VIX

Take a look at this chart to see the opportunity I’ve been talking about…

This is a three-year chart of the VIX. As you can see, it’s been marked by very clear support and resistance lines – one just under 20 and the other just under 40.

As you can see, the one just under 40 was tested earlier this year. More important, in the past few weeks it tested it again… and managed to close significantly above it.

At the same time, the Slow Stochastic indicator at the bottom of the chart (which is smoothed out over 14 weeks) is showing the VIX as oversold. Nearly every time the Slow Stochastic indicator has become oversold – meaning the red and black lines drop under 20 – the VIX went on to rise for the next ten to twelve weeks.

If the VIX is rising, that means the Dow Jones should be falling, possibly breaking under 8,000 sometime in the next few weeks and head towards 7,000.

The play should be obvious. But I’m going to point it out anyways because I’m feeling saucy.

If the Dow Jones drops under 8,000 as the VIX spikes, buy a put on the Diamonds ETF (NYSE:DIA), which is an ETF that tracks the value of the Dow Jones Industrial Average.

This from Smart Profits Report:

Congratulations… you’ve almost survived the most volatile stock market of our generation.

At least for 2008 anyway.

And if you’re asking yourself whether it’s time to buy stocks as the CBOE Volatility Index (VIX) is receding and valuations are at record lows, I offer this: Before jumping back in the water, be sure the sharks have fattened up and left the area. Forget “blood in the streets”… make sure there’s no “blood in the water.”

And amid the gloom and doom, I’m also going to offer up a more bullish, optimistic outlook: While the economic outlook remains very weak, the stock market is, after all, a market.

By that, I mean that the main factor that drives prices up or down is supply and demand (with a hearty dose of fear and greed tossed in for good measure, too, of course). So what do we really know about supply and demand? And more importantly, how can we profit from it?

Look Forward, Not Back

Let me put it this way: The view ahead is better than the one in the rear view mirror. In fact, even over the past week, we’ve seen many examples of how the lack of supply for stocks is driving prices higher – even in the face of terrible fundamental news.

The issues are worth noting, in order to keep the impact in context…

• On the political front, we’ve seen the bribery of government officials in an attempt to sell a decision-making seat in one of our top governing bodies.
• We’ve seen one of the most highly regarded hedge fund managers be exposed as a charlatan, wiping out individual and seasoned professional investors alike.
• On the economic front, we’ve seen massive job losses that were substantially worse than expectations – and while this is a backward looking indicator, economists are now talking about double-digit unemployment.
• The Federal Reserve has hacked interest rates to the lowest level ever in what seems like the latest in a series of desperate reactionary tools to stave off the expanding and increasingly ugly recession.

The current climate resembles a rugby scrum, with each new issue piling on top of other existing ones. And they throw up questions about the very stability of our investing framework.

But underneath the bad news, there is still some resilience…

So Much For Selling Pressure: These Two Stocks Reported Awful Bad News… And Investors Loved It!

For example, we’ve recently seen Texas Instruments (NYSE:TXN) and Nokia (NYSE:NOK) dramatically reduce their earnings estimates for the current quarter and offer a dour outlook for 2009.

Specifically, Texas Instruments expects revenues to slump by 26% to 32% sequentially. Yet investors “rewarded” the stock with a 5% boost the day after the announcement.

Nokia has reduced its guidance twice so far this quarter – once on the earnings call and again at its capital market day on December 4. Expectations for fourth-quarter handset shipments are now a negative 5%. And while the stock initially dropped by 3%, it’s up 6% since the latest reduction.

What does this say? To me, it’s clear that the downward pressure on stock prices that we’ve seen from forced selling is over. So is this just cause to get back in the investing saddle? Consider these three reasons…

Three Reasons To Resume Your Investing… But With A Caveat

• All three major stock indexes closed above their 50-day moving averages for two straight days – the first time that’s happened since August.
• There’s also a lack of selling pressure for tax-loss purposes.
• Dow Jones reports that 344 funds liquidated in the third quarter. That was the first time on record that more funds disappeared than launched. It also means that there’s likely to be less selling pressure ahead.

All three of these reasons for buying stocks are valid. But beware… with a potentially disastrous earnings season on the horizon and volume drying up as we head into the Christmas season, short sellers may take the opportunity to drive stocks back below their 50-day moving averages if for no other reason than a lack of buyers. Larger funds may also take the opportunity to reduce potentially volatile positions.

Corporate America’s New Tagline: Aim Low!

At this time of year, thoughts turn to the jolly fat man who represents gift-giving and good cheer. Question is: Will he hit Wall Street this year?

Investors are hoping for the oft-mentioned “Santa Claus Rally,” but in a thin market like this one, it’s easy to be shaken out of a 10% stop-loss simply due to increased volatility.

The next fundamental opportunity to invest will be after we have a feel for what first quarter corporate earnings will bring in terms of growth rates and profit levels.

The January earnings will provide management teams with the opportunity to reduce expectations to a point where they will be easily achievable. Once the bar is set low enough and investors are comfortable with growth rates, they will begin to take longer-term positions and the stock market will likely stop behaving like a casino.

If you prefer to look at the technicals, simply wait until the indexes prove they can hold their 50-day moving averages under increased volume – and be ready to sell if earnings season proves to be worse than we are currently expecting.

Source: As Wall Street Selling Pressure Eases, Three Reasons To Invest Cautiously

Today, the situation for the VIX is looking quite intriguing. The highly watched index found the momentum to drop below its 50-day moving average. The VIX is currently indicated at 58.93, just below the moving average’s level slightly above the 60 level.

This is only the second time since the end of August the index has traded below its 50-day average. The last time was in late November and the trend lasted for just a few trading sessions. If today’s drop below the resistance level stands up, it will be an indicator of positive action to come.

What does it mean?

As a derivative indicator, the VIX is simply a mirror of what the overall market is doing. By itself, it has no inherent fundamental value. When it declines, it simply tells investors that volatility in the overall market is on the decline.

For average buy-and-hold investors, the VIX has little importance other than telling them the volatile, nausea-inducing ride that is the equities market is beginning to calm. But for options investors, a falling VIX proves that options prices are falling and the spreads between put and call premiums has narrowed significantly. After all, that is what the indicator is designed to tell us.

For the past few weeks, it has been difficult to implement many traditional options plays because implied volatility (the premium added to an options selling price) has been so high. An underlying stock needed to make a sizeable move for the play to pay off. But now that volatility is on the decline, options prices will drop and the profit potential will return. In other words, we can get back to traditional options strategies.

One company worth watching is Arena Pharmaceuticals (NASDAQ:ARNA). In case you missed the news from this $289 million biopharmaceutical this morning, the company just announced clinical testing results for its closely watched obesity-fighting drug, lorcaserin. Of the 469 obese patients in the trial, a statistically significant proportion of them lost more than 5% of their body weight when compared to testers that received a placebo treatment.

While the drug still has a way to go before reaching the market, this is good news for the company in a highly competitive market. So far today, share price has risen by over 10%.

Options investors looking for a trading idea should look at the company’s January 5.00 calls (UGGAA).  Trading for just $0.15, these options have a strong shot at profits as more investors learn of the good news surrounding this company.

As the VIX surpasses its recent lows, more and more options trading opportunities will arise. Keep your eye out for high-potential plays and take advantage of the market’s latest trends.

Source: The VIX declines, Arena Pharmaceuticals (NASDAQ:ARNA) surges

This from Smart Profits Report:

I’ve been spending the past two weeks intently trying to make sense of the dramatic shifts in our financial markets, the U.S. economy, and even our societal mood.

The news is not good.

In fact, a friend of mine who’s an investment banker summed up the current conditions best, using just one word: “Brutal.”

She reports that her business hasn’t just slowed… it’s at a complete standstill. As a result, she and her colleagues won’t receive any bonus this year.

Meanwhile, the mainstream media continue to rant and rave, almost relishing the situation. A popular radio talk show host is predicting financial Armageddon in the United States, terrorist attacks and pretty much every other type of catastrophe. Frankly, I’m surprised a devastating locust attack wasn’t mentioned.

And I bet that if you talk to people you do business with – from your local shop owner, to gym manager, they’ll tell you that business is off considerably.

Before we dig into the other side of this mess, let me just state for the record that this is a scary time – and things will probably get worse before they get better.

But if you’re one of those folks who are having a difficult time picturing the other side of this mess – a brighter side – you need to realize just how extreme market conditions already are. As the saying goes, “This, too, shall pass” – and the market will eventually return to normal.

Here’s a little perspective – and some common sense…

Perspective Amid The Panic

Take a look at the following facts – ammunition that suggests we’re due for a bull market.

Okay, maybe not today… maybe not next month… maybe not even in the first half of next year. But the numbers below should give investors confidence that it will soon be time to back up the truck and load up on stocks.

#1: Excluding the 1929-1932 crash, bear markets recouped their losses in an average of 22 months.

With the exception of 1929, the largest declines were as follows:

– The 1937 Bear Market: A 50% decline, which lasted 13 months and recovered all its losses in 58 months.

– The 1974 Bear Market: A 43% decline, which lasted 21 months and recovered all its losses in 21 months.

– The 2002 Bear Market: A 45% decline, which lasted 25 months and recovered all its losses in 40 months.

The current bear market is down 52% – from peak to trough – and has lasted for 14 months.

#2: According to Wells Capital Management, between 1984 and 1994, the loan delinquency rate was above today’s level.

In fact, current business loan delinquencies are actually near record lows and consumer loan and credit card delinquencies are at the same level as they were three years ago.

And while delinquencies will rise further as the economy regresses, Wells believes this doesn’t support a depressionary debt collapse.

#3: Volatility is at an all-time high.

During 1929, volatility peaked at 68%, according to Barron’s. In 1987, it peaked at 64%.

The Volatility Index (VIX) recently set an all-time closing high of 80.9 on S&P 500 options expiring in 30 days, which indicates an average daily move of 5%.  That’s an unsustainable amount of volatility and the markets will certainly slow down and become less frenetic.

#4: At the recent lows, the S&P’s annualized 10-year real return was a negative 3.8% – an all-time low. At market lows of 1974, the trailing real 10 year annual loss was 2.7%.

#5: Only 16 stocks in the S&P 500 are positive on the year.

#6: Morningstar tracks over 11,000 equity mutual funds. Every single one is down for the year.

I share these statistics with you, not to show you how dire things are, but to illustrate the excessive fear that investors are experiencing. So what’s the solution?

In Times Of Pain, Go Against The Grain

Market history teaches us that during these kinds of extremes, it’s usually a good time to move in the opposite direction.

I’m not necessarily recommending that you load up on stocks today, because I think we have a little more pain to experience yet.

But with the market so far past its normal limit, I fully expect it to return to a more typical environment. And in order for that to occur, the market must rise significantly.

I believe the next six months will be a once-in-a-generation opportunity to buy assets at irrationally low prices.

Source: The Numbers Don’t Lie… Why A Bull Market Will Arrive Sooner Than You Think