This is the bottom line on the VXO

Charles Sachs has utilized S&P 100 for the past 14 years, both as a trader and an advisor. He uses 24 proprietary indicators in order to structure options strategies which can generate gains whether the market moves up, down or sideways.

As of 9:30 a.m. est., financial markets are set to open lower with the S&P 500 futures trading down 1.0 point, which 1.25 points below fair value.

The short-term market trend is down, and the intermediate-term market trend is up.

The (XEO | Quote | Chart | News | PowerRating) (S&P 100) index traded higher on Wednesday up 3.89 points to the 594.79 level.

Financial markets rose in price yesterday despite the downtrend in financial markets shifting lower on Tuesday. Although a rise in stock prices was not the most likely scenario for financial markets, it was also not unexpected. Financial markets do not move in a straight line when they are trending. Nevertheless, it remains most likely that financial markets will resume their downward movement in price shortly.

Given the strength and persistence of the recent rise in stock prices, the (VXO | Quote | Chart | News | PowerRating) Volatility index has now declined to the 10.31 level. The VXO index measures the expected volatility or movements in the S&P 100 index.

When the VXO index is very low, as it is currently, it shows that investors expect volatility in financial markets to be muted, and accordingly there is less demand for index options, and specifically put options.

The VXO Index is the predecessor of the (VIX | Quote | Chart | News | PowerRating) Volatility index. Historically these indexes show extreme investor complacency and forecast a market top when the indexes approach single digits. The all-time closing low on the VXO index is 9.87. With the VXO presently at 10.31, investors are overly complacent, which is sounding a strong warning signal of an impending drop in stock prices.

Bottom Line:

Investor are overly complacent and financial markets are susceptible to a drop in price, and perhaps substantially so. With current strength in financial markets in contrast to overly bullish sentiment, caution is required.

Sincerely,
Charles Sachs
Chief Options Strategist
www.PatientTrader.com