FRIDAY OCTOBER 30, 2009

VIX Complacency

Today, with the Dow down 250 points, the market received a slap in the face.  The VIX index, the market's measure of future volatility or "fear" index, shot up 6 points to 32.  Early this week, the VIX dropped below 20 for the first time since August of 2008.  The market has become a little complacent, perhaps sounding the all clear signal too early.  Recall that the VIX exceeded 80 back in the dark days of September, 2007.  Yes, the market has recovered nicely.  But the world is still a dangerous place.

Commodity prices are rising, the dollar is falling, the consumer continues to struggle, and the financial balance sheets of governments everywhere are scary.  The spike in volatility from below 20 to 32 comes as no surprise to me.  Complacency always leads to a shock. I doubt that today's weak consumer income and spending numbers were so weak as to generate a downdraft in the Dow.  It is the excuse to take profits.  A run of the mill correction.  A 10% correction in the market after a 50%+ run should not come as a surprise, but should be expected.

The silver lining in this correction is the amounts of cash still sitting on the sideline.  Money market investments are still historically high.  As the market corrects, it will create an opportunity for those investors who missed the big run to get back in.  And that should limit the downside to the "normal" correction of 5-10%.

POSTED AT 1899-12-30 15:29:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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