ORIGINAL VOLATILITY INDEX HASN'T REACH 1987 PEAK -- DOLLAR IS RISING BECAUSE FOREIGN CURRENCIES ARE FALLING -- SCARED MONEY FAVORS BILLS OVER BONDS -- GOLD SELLS OFF ON HEAVY VOLUME -- OIL HITS 12-MONTH LOW

MORE ON VOLATILITY INDEX ... There seems to be a lot of confusion regarding the unusually high readings in the VIX. This may help. The CBOE Volatility (VIX) is currently trading at 75 which is the highest level in its history. That history, however, doesn't extend back to 1987. Chart 2 shows the Original Volatility Index (VXO) which which was introduced in 1993 but backdated to 1986. It hit 100 today. That earlier calculation had the VXO reaching 150 during the 1987 market crash. That means that the Volatility Index still hasn't reached the peak hit in 1987. But its meteoric rise is certainly scary. Although they may not have reached record highs, both volatility gauges are extremely overbought.

Chart 1

FOREIGN CURRENCIES ARE TUMBLING ... One of our readers asked why the U.S. Dollar is rising. The answer is because foreign currencies are tumbling. Up until recently, the perception was that mortgage problems were limited to the U.S. As a result, the Fed lowered short-term rates aggressively to help stabilize the economy while foreign central banks kept rates steady. The dollar fell sharply as a result. During July, however, the perception grew that global economies were being adversely effected as well. It was just a matter of time before their weaker economies would force them to lower interest rates. As a result, foreign currencies tanked. That's why I've repeated the idea that the dollar is rising more on foreign weakness than on U.S. strength. The yen is the only foreign currency that has gained against the dollar. That's due to the continued unwinding of the "yen carry trade" that started last summer when traders were forced to buy back their yen shorts and sell assets elsewhere.

Chart 2

WHY BOND YIELDS ARE RISING... Another reader asked why bond yields ro this week in the face of falling stocks. Usually, bond yields fall with stocks as bond prices rise. Not this week as shown in Chart 4 which plots daily bars for the 10-Year Treasury Note Yield. As far as I can determine, the reason bond yields rose is because the U.S. government started selling bonds to raise money for the huge bailouts that they've promised. A greater supply of bonds on the market pushed bond prices lower and bond yields higher. Chart 5 shows, however, that the 3-Month T-Bill rate fell this week. That means that scared investors are continuing to buy T-bills as a refuge from fall stocks. Apparently, investors view T-bills as a safer bet than T-bonds during the current crisis.

Chart 3

Chart 4

GOLD HAS BAD DAY ... Most commodities fell sharply today which continues the heavy selling that started in July. What was different today was that gold also sold off sharply and on heavy volume. Chart 5 shows the streetTracks Gold Trust (GLD) tumbling -7.30%. It's also trading back below its 200-day average. The latest jump in gold began in early September as stocks were starting their latest downleg. I wonder if today's gold selling is a sign that investors feel the stock selling is overdone. Crude fell $8 to close below $80 for the first time in a year (Chart 6).

Chart 5

Chart 6

OVERSOLD MARKET ATTEMPTS LATE REBOUND ... The fact that the Dow closed only 128 points lower today may not sound like a good day. But it was down 700 points earlier in the day. The 14-day RSI line in Chart 7 shows the Dow in the first short-term oversold condition (below 30) since early August. The hourly bars in Chart 8, which show the last month's trading, shows the 14-hour RSI putting in a small "double bottom" from oversold territory. That's the most encouraging sign since the latest market slide started. The monthly bars in Chart 9 put things in better perspective. The 14-month RSI line has fallen below 30 for the first time in ten years. Even more important is the fact that today's low put the Dow within 800 points of its 2002 intra-day low which is an area of potential major chart support (see box). That may be close enough for some institutions to start doing some bottom fishing. We won't know that, however, until stock prices actually start rising. Wouldn't that be a pleasant change.

Chart 7

Chart 8

Chart 9