Reduced Volatility points to an 'Intermediate Uptrend'

The volatility on the Indian bourses has been consistently low during 2009 so far, as compared to the volatility prevailing at the same time in 2008. Volatility can be measured in two ways:

• Historical volatility capturing the price changes over past trading sessions (intraday), measured by standard deviation for January 2009 was at 1.5% as compared to 3.2% in January 2008.
• Implied volatility measures the expected volatility using option prices, measured by the VIX index of NSE has come down to 35 (it closed at 35.57 on 13th March 2009), after touching a peak of around 90 in November 2008.

The Chicago Board of Options Exchange 'CBOE VIX' is currently around 40, after recording a peak level of 89 in October 2008. High volatility results in wide swings in the markets as investors lose the ability to think and act in a rational manner. Higher volatility also leads to increased selling by FII's. Low volatility currently means low fear levels amongst investors, which is pointing towards an uptrend in the markets in the near short term.

The short term uptrend (or bear market rally) which may last till the current expiry of F&O contracts i.e. 26th March 2009, holds a lot of promise as the indices can move up by another 10-15% in this period. This trend may be utilised to book profits/losses towards the upper end (9500-9800 on the Sensex). However long term investors who have entered at lower levels can continue to hold their stocks. Investors are advised to watch the VIX levels, as VIX movement above 45 will give a signal for a further downside.