Afraid Yet? Options Measures Say Fear Hasn't Swelled

The velocity of the stock market's decline in the past two sessions and the dire condition of the Nasdaq Composite Index have investors wondering about the short-term future of the tech-laden index.

Jay Shartsis, the options strategist at R.F. Lafferty in New York, is wondering, too. "The question is: Will the Nasdaq hold above zero?" His wisecrack came in the minutes after the close of trading that brought the Nasdaq down 129 points to accompany the Dow on its 436-point drop.

But as options traders checked with their historical gauges of investor fear, none was showing the kind of near panic believed to foreshadow a meaningful rebound in the market. That means more agony could be on the way.

At issue are the readings given by some of the options market's gauges of fear today: the Chicago Board Options Exchange Volatility Index, or VIX, and the American Stock Exchange's volatility index based on certain options prices of the Nasdaq 100 unit trust (QQQ), or QQV.

Neither, in the opinion of some, reached anywhere near the impressive levels that could signal a long-lasting upswing for stocks.

Joe Sunderman, an analyst at Schaeffer's Investment Research, said with the VIX at 35, the measure "still needs to go a lot higher," and the QQV, "can go a lot higher" before the two measures show enough fear in the market to justify thinking about a real rally. Just looking at those two barometers, they are "not showing a lot of fear at this point."

The VIX ended the day up 19.63% to 35.11, while the QQV rose 4.37% to 62.61. The jump in the VIX was sizable to be sure, while the rise in the QQV was much more modest. Measured against historical moves, though, the readings today are skinny. Data for the QQV only go back to September.

The QQV is still well off its all-time high of 75.40, where it closed on Dec. 20. The VIX, meanwhile, intraday, hit 37.72 on Dec. 21 and posted a 52-week high of 41.53 in last April's carnage. Since December, the market has lost considerable ground, showing investors should have been more afraid.

The VIX rises when put -option buying on the S&P 100, or OEX, increases. Investors buy put options to either protect long positions or to speculate on further downside in the underlying security.

Traders interpret the VIX and QQV as contrarian indicators, meaning the higher they go, the better, because it means a cycle of fear is ending.

Meanwhile, another gauge of investor sentiment, the CBOE equity put/call ratio, was high, but the levels weren't sky-high. After the close, the equity put/call ratio was at 0.76, indicating anxiety but not a lot of panic. The 0.76 level means that for every 100 calls that traded this morning, 76 puts traded. At times last fall, the equity put/call ratio rose to 1 and above. Some analysts were surprised that the equity put/call ratio didn't hit that Monday.

Meanwhile, the CBOE equity put/call ratio 21-day moving average was still in an uptrend as of Friday's close and will arguably be that way in the wake of today's market action. Some market watchers follow the 21-day moving average as a signal to get into the market and exit. So far, with the moving average still in an uptrend, it is not giving off a buy signal. When the ratio peaks and turns down, that is when a signal is given off. It's not there yet.

"We continue to be cautious," Sunderman said, adding that the firm was maintaining a bearish stance on the market.

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