VIX is Settling Down

VIX is settling down. This fear/greed indicator was at all time highs this past few weeks, as the majority of the market players exited positions and ran for cover. At 7700 as a test, and repeated tests at 8000 we believe the market may be beginning to show some signs of health. Buffet wrote an article in the New York Times just last Friday discussing his readiness to begin buying stocks, as we now have values. We agree. The market is slowly taking in the outright fraud perpetrated on this country and the world, and beginning to open the credit markets.

Things are not better, there is still a 10 billion "build democracy in Iraq" war, a massively high unemployment rate, and issues that will take years to fix. But, the market may be ready for relief.

The DJI made its biggest one week gain measured from close to close since March 21, 2003 after a week of erratic trading which saw the VIX reach its highest level ever on Friday. For the S&P 500 it was the best week since February and for the NASDAQ the best since August 8. The performance could have been better were it not for a late sell-off on Friday driven either by traders closing positions before the weekend, mutual fund redemptions or the settling of options contracts.

Friday also saw the TED Spead ease the most for the week as it fell by 11%. But as the following chart of the TED spread over the last year shows, it has a long way to fall before inter-bank lending will revert to its more normal level. We can think of the TED spread as an index of fear - a measure of the extent to which banks distrust one another and fear they will not be repaid for any loans they make. Until this fear index comes down volatility will continue.

Floydian tirades last week on question authority have prompted some great emails from subscribers, as we discuss what I mean by "do not trust the rule makers." Here's an example, and HOW it affects the market:

1. When 9/11 occurred we rushed to be safe. The TSA was born for air traffic "Terror" , and never have a more ridiculous set of rules ever been put in place to take away our human rights, and do little to help us with terrorism.

I travel regularly and am amazed how easily people in this country have simply accepted being treated like criminals as we move through these lines, even though statistically safety checks prove so much is never caught.

My favorite is that we must turn our cellphones off as the boarding door closes, and for the flight, because "cell phones can interfere with airplane radio reception." And most passengers dutifully follow the rules.

Not Floyd. I refuse. This is a joke rule, and is not true. If you believe that the voluntary asking of 200 people on an airplane to "turn off the phones," without enforcement (meaning, how many like me won't or don't turn off the phone), truly could impede the safety of the airplane, you are naive and believe still there are WMD in Iraq:) Imagine the ridiculousness here....an airplane worth millions, constantly upgraded, allowing cell phones to interfere with reception.

I studied it when it came out, and can find NO proof and NO fact that this is true. I refuse to do it. I've flown 100's of times since this rule was put in place, and not one of the planes have crashed. Either I personally have endangered the lives of all the other passengers on my flights, or the rule is bogus. And trust me, I'm probably 50% of the plane that ignores, or forgets these rules. So why are they rules?

Do not argue now and tell me "why not just do it"...as this is the same argument as "why don't you let the police look at something of yours if they stop you if you're not guilty", as the logic becomes that you do not have rights.

My daughter was stopped by the police several years ago while I was her passenger and the officer, who saw her with a faulty back light, asked to look in her trunk. I told him to pound sand. He said "if you weren't guilty of something you would have no problem with this." I told him to pound sand and go visit the Constitution, as we had done nothing wrong, and felt violated that my child was being even "accused" of anything. He gave her a ticket for the faulty tail light, which she deserved, and told me "people like you make it difficult for law enforcement".

Read this sentence above twice. If you don't get the issue, you're part of the problem. I was simply an old white guy in a nice car, wearing a suit, with a bad tail light. This "officer" of the "law" felt that we may have been complicit in some other crime, for whatever reason, and suggested we "show him" so he could be certain. I got his badge number and wrote to the city to file a complaint, which of course, was never even answered.

1 in 3 new Atlanta police officers are hired when they have criminal records.

Do not let America become Amerika. It is these "little things" that we miss. When Greenspan told us for years that lowering interest rates was good, I called him Bubbles Greenspan, and was not a popular "host" at OEX.

When I tell us now that deficit spending created this aura of illusion I've been argued with for several years, and suddenly all my "false facts" arguments are become sadly true....the facts were false.

This is how the cellphone on the plane is like the stock market. Some things you are told are simply NOT true. Question authority, respectfully. When the airlines find a way to make wireless profitable for them, suddenly it will be "safe" to allow cellphone usage. Just wait.

There are no WMD in Iraq.

From subscriber YH:

"I am somewhat nervous that many people are talking about a possible market crash next week or a week later. I am interested to know your opinion?

Your Dow projections say that deepest bottom is 7700, what time frame are you indicating?"

As you study our Dow projections today, make note that we continue to see a potential bottom test, as low as 7700 on the Theoretical Dow, within the next 7 to 10 days. This is now only a 50% likelihood, however, with more credit markets potentially freeing up and comments like Buffet made (buy American stocks now) beginning to free the market. We believe the market is close to, or has, tested its bottoms.