Bernie Schaeffer Schaeffer’s Investment Research Inc.
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"Options on stocks and currencies show 'strong warning signals' that the recent rally for both may be poised to end, Citigroup Inc. said. The VIX, which tracks the cost of using options as insurance against declines in the Standard & Poor's 500 Index, has risen even as equities trade near seven-month highs, according to New York-based Citigroup ... 'We are seeing a disconnect between what's happening on implied volatility and underlying price action across a host of markets,' Citigroup chief technical analyst Tom Fitzpatrick in New York and strategist Shyam Devani in London wrote yesterday. 'It suggests to us a real danger that a good consolidation/correction to a lot of recent trends may be near.' The S&P 500 closed at a seven-month high of 944.74 on June 2 and slipped to 931.76 yesterday. The gauge has recouped 38 percent since March 9 on speculation $12.8 trillion pledged by the government and Federal Reserve will help end the recession. The VIX, a gauge of expected swings over the next 30 days, is up 7.7 percent at 31.02 from its eight-month low on May 19. The measure hasn't closed above 34.50 since May 4 ...'Our fear is that complacency is back in the market and the low volatility has fueled a lot of these moves,' the strategists wrote. 'This pick-up in volatility seems to be warning that nothing is one-way forever and when you start to believe that it is when you get hurt.'
(Bloomberg.com - "VIX, Currency Options Signal Rally May End: Technical Analysis" – 6/4/09)

Schaeffer's addendum: It's often very difficult to properly distinguish the smart money from the dumb money players, and during some periods a particular constituency might be smarter or dumber than at other times.

The strategists in this piece are concerned that "complacency is back in the market," presumably because of the low level of the VIX relative to the past six months or so, and presumably dumb money is responsible for this. Yet the recent gains in the VIX when it should theoretically have been declining as the market rallied is "a warning that nothing is one-way forever" (and smart money is presumably responsible for this divergence). While this presumption may prove to be correct, it is also possible that the recent slight uptick in the VIX will prove to be yet another brief interruption in the ongoing VIX decline and will thus have no negative implications for the stock market.

One indicator that we closely track is the volatility skew on the VIX options, and it has strongly suggested that VIX option players are in the smart money camp. Simply put, when VIX puts become expensive relative to VIX calls in the extreme, the VIX is likely to turn lower. And when VIX calls become expensive relative to VIX puts in the extreme, the VIX is likely to head north. Though VIX calls have in fact grown more expensive relative to VIX puts, we have not yet noted an extreme in this relationship, which to us signifies that the VIX may have some further retreating to do before it bottoms. This in turn would provide further breathing room for the market to extend its gains.

Bernie Schaeffer:
• Developed Expectational Analysis®, a proprietary, three-tiered method of options analysis combining technical and fundamental studies with the analysis of investor sentiment.
Publisher
• In 1981, Bernie launched the newsletter, Bernie Schaeffer’s Option Advisor. Serving as senior editor since inception, Bernie has led the Option Advisor to become the nation’s leading options newsletter. Features: market commentary, specific trade recommendations, and trading strategy.
• Launched SchaeffersResearch.com, in 1997. A four-time winner of Forbes “Best of the Web” award, the website has also received positive mention in Barron’s, AAII and The Wall Street Journal Guide to Online Investing - “An independent options site that is one of the best for providing primers for both novice and advanced investors.” Features tools, quotes, data, commentary, and education.
• 10 Days to Successful Options TradingSM – This multi-media home study program teaches options basics. Learn fundamental strategies with hands-on application exercises and examples.
Author
• The Option Advisor: Wealth-Building Techniques Using Equity and Index Options (1997)
• New Thinking in Technical Analysis: Trading Models from the Masters – The industry has viewed Bernie’s Expectational Analysis® methodology as a groundbreaking approach to trading. Proof of this came with the publication of this new book by Bloomberg Press. One of twelve authors, Bernie was honored to be chosen from hundreds of market analysts to explain his methodology.
• Writes a monthly options column for Bloomberg Personal Finance magazine.
• Multexinvestor.com regularly calls on Bernie to contribute to their “Analyst Corner.”
Awards and Recognition
• Three time winner of The Wall Street Journal stock picking contest.
• Ranks fifth among market timers tracked by Timer Digest for the past decade.
• Dick Davis Hall of Fame inductee for his bearish posture ahead of the 1987 crash.
• He is known for successfully maintaining a bullish market posture throughout the 1990s.
• The Market Technician’s Association (MTA) awarded Bernie “Best of the Best” in 1997 in the field of Sentiment/Psychological Analysis.
• Bernie is regularly featured on investment chats on Yahoo! Finance.
• Bernie’s views on the stock market and the economy are regularly quoted in The Wall Street Journal, The New York Times, BusinessWeek, Investor’s Business Daily, and USA Today.
• Both Barron’s and The New York Times have featured Bernie in “Question & Answer” interviews.
• Recognized as a CNBC “Market Maven.”
• Appears regularly on national financial broadcasts such as CNBC, CNN, Bloomberg Television, the Nightly Business Report, Wall Street Week with Fortune and Fox News. Also serves as a guest host on CNNfn.
• Frequently invited to speak at national investment conferences and seminars.
• Regularly sits on Options Industry Council panels around the country.
• One of 50 market strategists appearing in BusinessWeek’s 2001 market forecast.