As we look to find the best plays and ideas to make money we must also be aware of emotions and feelings, which play a critical role.
Market sentiment can be measured using various instruments which basically tell us how/why the money is flowing. Some of the tools I like to use include the McClellan Oscillator, CBOE put/call ratios, Breadth indicators, bullish % index, Rydex ratio and the volatility index, or the VIX.
The VIX right now could be considered showing a high degree of complacency. With market volatility checking at 12.5% and realized volatility also tipping the scales lower there really is not much room for a negative event to occur without much damage. To be clear, the market is expecting little volatility and perhaps movement over the next thirty days.
We are heading into the heart of earnings season and while it’s not prudent being short during this time we will certainly have our share of ‘haves and have nots.’ This is still a stockpicker’s market and as such those who beat and guide higher will be rewarded, those who don’t will not.
So, with the VIX so low is it prudent to buy some protection? It is always good to consider protecting a portfolio, when options are cheap it’s a great way to insure against a major market catastrophe. You wouldn’t want to buy when it’s too late as it would be too pricey – would you be calling your insurance agent for fire insurance protection if your neighbor’s roof were on fire? Of course not.
One note. Just because the market is flashing an overbought signal or complacency does not mean the condition cannot last. In fact, it usually does far longer than anyone expects!
Advice
Look for the signals of a breakdown before going short, otherwise just protect your portfolio buying cheap index puts and prepare to buy the dip!
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Bob Lang has been managing private options trading accounts for clients since 2004 and providing subscribers with guidance on trading options for income at Explosive Options since 2011.
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