Market-Bending Drugs

To quote Woody Allen's Crimes and Misdemeanors, in which the blow-hard character played by Alan Alda is asked what the meaning of humor, says, "If it bends it's funny, if it breaks, it's tragedy." Well, so far the market is merely bending and refuses to break.

But take solace in the fact that Alda follows up his theory by saying "Tragedy plus time equals comedy." So even if we do break, we at least can count on having a few good laughs at some later point this year.

What this means is that all the angst expressed by the talking heads over the past few months will be put in perspective, and we'll most likely find that like most other crises, the market managed to works its way through what is currently a tragic situation on many fronts.

That includes homeowners who find themselves in foreclosure and underwater, that their mortgages are now higher than the value of their homes, shareholders who have seen billions of dollars evaporate from both their personal funds and retirement and pension funds, and I'll even send out a few crocodile tears to employees of Wall Street firms and hedge funds that will now see their income slip from the 98th percentile to the 96th, or God forbid, find themselves unemployed.

Today's trading saw a narrowing of the trading range, and this was finally reflected in a decline in the VIX, which dropped 3% to $25.28, despite the fact that the major indices posted losses on the day.

This is a reminder that "volatility" is non-directional, not a signal that prices are declining. Volatility, both historical and implied, is really a function of the velocity and magnitude of price movement. So there could be an scenario in which stock prices drip slowly lower and implied volatility also decreases.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

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