Volatility spikes as panic ensues...

The only indicator not pointing to a bounce in stocks has been the volatility index VIX. At the market lows in August and November the VIX spiked to 37.50 and 31.09 as seen below indicating a panic. Today the VIX climbed over 4 to hit a high of 28.51, breaking the trend line made by the two most recent VIX highs. Volatility usually spikes at turning points and it appears we are close to one in the markets with this kind of action. The VIX could spike further up into the 30's sure, but after today's 17% gain its probably time for a relief rally. I am now in some beaten down growth stocks (WFR, SIGM, JASO and ICE) and cash, it seems to risky to stay short here.


On a side note, I have very very perplexed by the VIX basically going flat since the start of 2008 while the market basically crashed (nasdaq is down more than 10%). This is quite unusual and seems to indicate a general complacency about the decline but there are other theories. It might be possible that as we enter a new regime for the market (bear mode) the usual indicators may fail to work like they used to. Specifically, in a bear market volatility may tend to decline with prices as they "trend." Whereas volatility might spike on sharp short covering rallies, it makes sense to me but this goes against the usual "volatility spikes at market bottoms" idea. I have also wondered how the put to call ratio has been able to steadily climb lately while volatility remained dormant. This is generally a rare event for markets and has been suggested to be a very bearish scenario.

Some Nice Looking Charts

Have I gone mad? (posting only bullish charts this weekend) No, I'm not bearish on every stock out there, just most of them. Each of these stocks has a great growth story and had some recent news to help create a breakout pattern . I don't have time to go into the details on each one, but they are worth looking into. They certainly each have a nice looking chart.

Disclosure: I own ICE and WFR calls.

WFR Long Set Up

WFR is a stock that I was bearish on a few months ago when the steep uptrend in MEMC Electronics broke. The pattern began to look more and more like the Oneil proper short sale point with the stock vascillating about it's 50 dma. While the stock has been in this pattern is has consistently found support just below in the $50-55 range and it is about unchanged from where I became bearish. If WFR can break this series of lower highs and get out of the current range that its in, then there could be a nice move to the upside.



As you may have noticed, solar stocks have been hot lately (see JASO and LDK) as the demand for solar power is exploding. Currently the industry is unable to meet demand because there is a shortage of polysilicon supply, the primary semiconductor used in large scale solar cell manufacturing. MEMC Electronics (WFR) is one of the largest producers of poliysilicon and single crystal silicon in the world, so they stand to benefit greatly from the rapidly increasing price of the undersupplied polysilicon. In addition, the semiconductor sector has been showing signs of strength lately, so the stock may get some boost from that action too.


After doing a little digging I found out that the reason why WFR's run had paused was because they will miss expectations in the next quarterly report to be filed in November. They had some electrical problems during the expansion of one of their foundrys (material production plant). It sounds like an engineer hooked up a transformer backwards causing a brief power outage which led to a week long setback. If people are interested I can get into this into more detail, but generally speaking this minor setback should be viewed as a buying opportunity.


Ok, I usually don't like to get too deep into the fundamentals, but it just so happens that I actually know quite a bit about microfabrication as I am working on a PhD in electronic materials. Anyways, I think the stock is a buy on a clear close above that blue down trendline or during an intraday break of $62.50. The November $65 calls are attractive to me and I'd get out of those if the stock were to close below $55.