Jim Cramer

[LenaHuat]

Hi K

Thanks a million for this educational post abt VIX. It beats reading those online ....pedia

2day, the pain in Lehman Bros made it to the Frontpage headlines of both the WSJ and NYT
Looks like 3 out of 4 of Cramer's Factor 1 are in place:

Answer : Factor 1 (market sentiment.) The pain makes the FRONT page of the New York Times. Secondly, when the bull-bear ratio (in Investors Intelligence of the Investors' Biz Daily) shows a definitive majority of bears. Thirdly, large mutual funds withdrawals. Fourthly, when the VIX hits +40.

Actually there is a fourth sub-factor but I don't understand it and so like U say : "dun study much into what's written if can't understand the stuff.".

(To be cont'd)

[LenaHuat]

Warning : I've taken the liberty to cut-&-paste a little of what he wrote.

Capitulation
In every one of the mega-bottoms, we had what I describe as a “crescendo sell-off” b4 we had an “exquisite moment”.

A “crescendo bottom” is a bottom where a great many sellers converge at once to take stocks down to unusual levels versus the fundamentals. At all of the bottoms that I have found to be investible, you have between 400 and 700 new lows and only a handful of new highs. A second characteristic of a “crescendo bottom” is forced selling by brokerage houses. A third characteristic is a dramatic spike in volume on the exchange. A fourth characteristic is when underwriting dries up. A final indicator is what I call “stop trading, order imbalance” sign. But one has to be at the machine to see it happen.

The “exquisite moment” comes where one has to buy because the opportunity is so great, such as in 1991 and 2003 : the start of the war in Iraq after a 7-month and 3-year bear markets. The trick is not to know or try to predict the catalyst itself : that’s rarely known. But the set-up for the exquisite moment can be predicted much more easily than the actual trigger that pushes the market higher.

One other consideration : Sometimes the bottoms are so vicious and elusive that U need to test the waters first. For that, I suggest U start your buys in the morning of the bottom not with your favorites, but with some stocks that might have additional support from day traders and institutions. Buy the stocks that have been upgraded that morning. If the market does falter, the artificial buying that comes with every upgrade will at least cushion the downside for the stock you are using to test. Don’t leave it to chance or buy a stock that has no institutional support that day.

As this crisis is of such a large proportion, I've been reducing the size of my probes by a large measure.

[kennynah]

fear is clearly in the market....the bigger that fear, the bigger the opportunity....

when things are not so fearful, it's too late..

not to suggest sending in a big recce team..

anyways, Volatility will be high....selling volatility makes sense to me during this period.

one can trade VIX's volatility itself without having to get involved with actual stock counters...

[LenaHuat]

Hope some forumers have benefited (in $$ of course) by combining Cramer's thoughts abt the "exquisite momemt" and Mohamed El-Erian's recipe for market stablization.
I think there will be more 'exquisite moments' to come as the run-up back to DOW14000 is likely to be a 400metre race and not 100m dash.

The “exquisite moment” comes where one has to buy because the opportunity is so great, such as in 1991 and 2003 : the start of the war in Iraq after a 7-month and 3-year bear markets. The trick is not to know or try to predict the catalyst itself : that’s rarely known. But the set-up for the exquisite moment can be predicted much more easily than the actual trigger that pushes the market higher.

[LenaHuat]

Abt VIX:

The CBOE Volatility Index or VIX [VIX 32.07 -1.03 (-3.11%) ], the stock market’s gauge of investors’ fears, spiked above the 30 benchmark level for the 4th consecutive day, levels not seen since the Bear Stearns crisis that resulted in the buyout of the investment firm by JP Morgan Chase back in March 2008. The VIX which measures anticipated market volatility climbed on Thursday to an intraday high of 42.2. The last time the VIX closed above 40 was October 2002.

[blid2def]

Abt VIX:
The CBOE Volatility Index or VIX [VIX 32.07 -1.03 (-3.11%) ], the stock market’s gauge of investors’ fears, spiked above the 30 benchmark level for the 4th consecutive day, levels not seen since the Bear Stearns crisis that resulted in the buyout of the investment firm by JP Morgan Chase back in March 2008. The VIX which measures anticipated market volatility climbed on Thursday to an intraday high of 42.2. The last time the VIX closed above 40 was October 2002.

Below are my observations when I look further back at the VIX daily charts for 10 years and cross-reference against the S&P 500 over the same period. The sequence of VIX intraday over-40 spikes and the corresponding S&P reaction looks like this:

Spike in ~ Oct 1998 (uptrend up till Apr 2000)

Spike in ~ Sep 2001 (erm... I guess we know why there was a spike; but anyway - we got a dubious bottom; after the spike, we saw a 3-month recovery, 3-month-consolidation, and 4-month hospitalization)

Spikes in ~ Aug 2002 & ~ Sep 2002 (2-month consolidation period)

Spike in ~ Oct 2002 (bottom found; ~5-month consolidation and a 5-year bull run after that, up till last year)

Unfortunately, I don't have data beyond 10 years, so I can't see if there was any spike before Oct 1998. The spikes in 2002 are interesting to me. Should we be paying attention to the closeness of spikes (fear-fear-fear) rather than the isolated occurrences of spikes? Hmm.

[blid2def]

Some illustrations... I think the sample size of occasions where VIX burst 40 is too small for us to draw any reliable conclusions.

(1) VIX Weekly chart x 10 years


(2) VIX Monthly chart x 10 years


(3) VXN Monthly chart x 10 years (what "works" for VIX doesn't "work" for VXN)

[kennynah]

i read that the correlation coefficient. r square = ~ -0.8 for 2007, an inverse relationship.. some years, that relationship is tighter and other years looser.... it's just statistical number but i am sufficiently convinced that VIX is a pretty good gauge of fear factor...and that has almost always accompany a momentary bottom..which VXN also shows...

use more than VIX to get a more reliable signal for show some short term bottom...

[blid2def]

i read that the correlation coefficient. r square = ~ -0.8 for 2007, an inverse relationship.. some years, that relationship is tighter and other years looser.... it's just statistical number but i am sufficiently convinced that VIX is a pretty good gauge of fear factor...and that has almost always accompany a momentary bottom..which VXN also shows...

use more than VIX to get a more reliable signal for show some short term bottom...

Okay, I guess the difference in our observations is in the timespans. I guess I'm just looking at one aspect of what Cramer said - that part of the exquisite moment (I read that as for a longer-term trend reversal / recovery) is a VIX hit at 40. For short-term recoveries, I agree that a VIX spike does seem to have a correlation with the price. The charts do bear that out.

But hmm... I wonder if that extreme fear thing works for a long-term trend reversal. Hmm....

[kennynah]

But hmm... I wonder if that extreme fear thing works for a long-term trend reversal. Hmm....

maybe when all the banks all become under $10 and goldwoman sags become $50...unemployment rate hits 10%...negative GDP of -20% for Q3...hahaha... almost forgot....CL spikes past $200