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Up14
Alright so maybe this is really minor in relation to the stuff we have to know, but nonetheless I want to understand!
On page 639 of book 1 CFAI it explains the CBOE volatility index (VIX)
It is stated that (1) “the VIX rises when market participants become fearful of an impending market decline”
Then it says (2) ” when other indicators suggest that the market is oversold and the VIX is at an extreme high, this combination is considered bullish”
From statement (1), I understand that a high VIX indicates a bearish market because we are fearful of a DECLINE.
Why then in statement (2) it says that a high VIX points toward a bullish market???…Could somebody clear this up for me por favor? Muchas gracias
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Up5
I say it in a semi-spanish way inside my head :))
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Up4
@sidmenon @sophie
so am I supposed to look at all such indicators as contrarian? I just looked again and there is no sub-heading specifying that the following would be contrarian lol and not in every paragraph do they even mention contrarian logic (ex: not in the VIX one haha)
thus, how do I know to think direct or contrarian?
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Up4
@sidmenon @sophie
so for that particular MCQ, does it mean that for
A) low put-call ratio –> less puts on the market than calls –> people unwilling to sell –> bullish –> contrarian analyst will think bearish
B) high VIX –> bearish market –> analyst will think bullish
C) low mutual fund cash –> low cash for purchase –> cash was used up in “bullish” market (?? am I right on this interpretation?) –> analyst will think bearish
IN OTHER WORDS, the analyst will take the indicator, and interpret it the opposite way? is that it?
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Up3
@sidmenon’s right.
It’s a contrarian play. They believe that market indicators oscillates within a certain range, and if out of those range it is oversold or overbought. Therefore they view that if VIX is extremely high, the underlying asset is probably oversold (everyone selling stock, or buying put options), therefore they take the opportunity to buy those stock as they view it as oversold/undervalued.
Generally high VIX indicates uncertainty / bearish market – contrarians use technical analysis to try to gauge how much is too much and take the opposite view.
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Up3
I’m afraid you have to look at the question itself @lulu123. If there’s any hint of using technical analysis, extreme volatility and/or statement that indicate the analyst thinks it’s overdone – that’s it. you have to read carefully, but now that you get the concept it’s not hard, just a matter about being careful when reading.
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Up3
Haha, i also say no problemo all the time, sounds different in my head 😛
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Up2
No problemo @sidmenon ~O)
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Up2
No, actually, everyone doesn’t think alike. They are differentiating people into two categories, one who remember just the first part of that quote and the second who remember the whole quote. Out of these two, which is great and which is simple, well, that is completely subjective 😛
P.S. I tend to get more and more random as exams approach.
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Up1
@lulu123 Like @Sophie correct stated, you will have to look at the question. I can give you an example of a question which I came across in the latest practice exam i wrote.
Q. A contrarian technical analyst is most likely to be bullish based on a:
A. low put-call ratio
B. high volatility index
C. low mutual fund cash positionAnd the answer is B, which we know because of our discussions till now.
So I guess you don’t have to worry too much, they might not ask twisted questions when it comes to this topic.
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Up1
Yep. You are right. The analyst interprets it in the opposite way, hence the term contrarian strategy.
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Up1
@diya so basically everyone thinks alike…?
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