Traders are betting on a September stock market swoon

08/10/2009 12:08 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Bloomberg reports today that traders are buying options on the VIX, a measure of stock market volatility, that will pay off if stocks plunge in September. (Here's the link to the full Bloomberg story: http://www.bloomberg.com/apps/news?pid=20601087&sid=anWx7LRgrFtc )

The price of futures on the VIX now implies that traders believe that the VIX will climb by 13% in the next five weeks. (The VIX goes up as market volatility increases.) That's the biggest bet on volatility since August 2008, just before the Standard & Poor's 500 suffered its biggest two-month plunge in 21 years, according to Bloomberg.

You can read this data two ways, I suppose. If you want to believe this rally will continue, you can say that if "everyone" believes the market will go down, it's a sure sign that the market will go up. There's logic to that contrarian position.

But I think the alternative read is more likely to be right at this point. After a long rally, investors are starting to believe that the market must correct. That kind of belief, in the short-term, tends to be a self-fulfilling prophecy as investors edge to the door in anticipation of a downturn, thereby creating the very down turn they fear.

My take remains pretty much what it has been for the last couple of weeks. I don't see the need to run for the hills here. A fall correcton is likely to be exactly that, a correction, since there is a lot of money on the sidelines just looking for a dip to get back into the market. On the other hand, I wouldn't be buying new positions here and I'd be trimming some of my more over-valued positions.

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