January 08, 2004

VIX Goes Even Lower

Following up on the lead story in the January issue....the VIX is heading lower as the Nasdaq is headed higher. Coincidence? Probably not. vix.bmp If you're studying the "language of the market," as the master Richard Russell likes to say, what would you hear? Well...I like looking at the market's most active stocks. It tells you where investors are looking to make a play. It doesn't show much imagination...except perhaps in the Amex. Nasdaq Most Actives 1) Sirius (SIRI) 233 million shares 2) JDS Uniphase (JDSU) 83 million shares 3) Intel (INTC) 63 million shares 4) Internet Capital Group (ICG) 61 million shares 5) Microsoft (MSFT) 54 million shares Denning Comment: Are you kidding me? Are you completely serious? Internet Capital Group is selling for 41 CENTS A SHARE!! This is the stock Americans are staking their financial recovery on? Granted, an ICG, Commercequest, announced, according to a press release, "its intent to support Linux for IBM eServer zSeries with Process Manager for Data (PM4Data), a component of CommerceQuest's TRAXION Business Process Management Suite (BPMS). " I'm sure that's good news for ICG investors. But is this the kind of business deal that's going to pay for the retirement of millions of American investors? There was no dollar value attached to the new deal...no word of what size revenues it will generate. Will it turn ICGE's $120 loss in the last 12 months into a net gain? Or is the reaction to this deal--and the fact that investors are still pinning their hopes on a tech-led huge recovery in the Nasdaq--just more evidence that this is Tech Bubble Two, same bad dream as last time with same stupid tactical decisions by investors? The question is rhetorical. On the NYSE, Nortel (140 million shares) and Lucent (134 million shares) took the honors for top two most active. The telecom dream is alive and...no better. And in some ways, the nostalgic bullishness in tech is part and parcel of the entire "financial economy." Without Greenspan's liquidity, the chase for a home run tech stock would literally run of fuel. The Amex is about the only interesting exchange in terms of where the market is going (as opposed to where it's been). Three of the top five most active shares were exchange traded funds (PGIs as I call them. The QQQs led with 71 million shares trading hands. SPDRs came in second at 31 million. A stock, Viragen (VRA) came in at 10 million shares. The semiconductor holders that I've traded in Strategic Options Alert (SMH) came in at 10 million. And Harken Energy (HEC) of Bush fame was fifth with a tidy 7 million shares trading hands. A reader wrote asking/disparaging about the idea of using "index funds" to invest in the market, the criticism being that indexing is passive and that you don't invest in the stock market, you invest in stocks...in single ideas rather than the entire market. Point taken. However, that's NOT what I'm recommending with the PGIs I've been recommending. First, if you're bearish, index PGIS (DIA, SPY, OEF, QQQ) ARE an excellent way to take a bearish position ON THE ENTIRE MARKET. But if you're bullish, or if you're trolling different sectors looking for strong bullish or bearish undercurrents, these PGIs are a great way to go. You can think of them as risk aggregators. Instead of taking a lot of individual risks in single stock picking, you can take only one risk in one PGI that trades like a stock...but is leveraged to an entire sector, asset class, or country. For example, the March 04 IEF 85 puts (IEFOG) is a single, simple way to be "short" the U.S. bond market. This particular PGI is a play on the ten-year bond. But it's a proxy for the "big idea" that a weaker dollar is going to drive bond prices down and bond yields up (see the note below from the IMF about the U.S twin deficits causing a sell-off in U.S. assets.) Will it work? We'll see. But the fact that you can even take what I think is a relatively clear cut position so easily, like trading a single stock, is something you simply couldn't do with as much variety, affordability, and speed as you can today. THAT's why I like using PGIs--that and the fact that in a market that's all bubbled up again, looking for value is like trying to find a dry spot on the London pavement on a dreary January day.


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