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VIX Volatility Index Hits Historic High

Today was an amazing day. As I watched the action in individual stocks and industry sectors, those tied to the recovery in the economy we up much of the day in the 5% to 8% range. What I was seeing was substantial interest in buying the sorts of stocks that we own (strong growing earnings and healthy balance sheets). Then, General Motors was downgraded from a credit standpoint to the point that much of the market now believes they will not exist in the near future.

This news was big enough to send the overall market down, but I fully believe we are starting to bottom, industry by industry.

The graph above shows the VIX Volatility Index at a historic high. A reading this high represents significant option bets against the market, and it has historically been a very accurate and profitable contrary indicator. A high VIX means a big market rally is in the future – there just needs to be some catalyst.

That catalyst will likely stem from the massive liquidity that is flooding the markets. It is beginning to turn the credit markets positive, and the equity markets will likely follow them once investors believe that the credit freeze is behind us.

Hang in there.