If you're reading this blog then you already know that the selling over the past week has been relentless. Just this week the market indices lost 15% (NASDAQ) to 20% (NYSE) of their value.

What's been really crazy to watch is the action on the VIX. I've been following this chart as a contrarian indicator using its action during '99-'02 as a guide. In fact, just a few weeks ago I mentioned that the VIX had hit levels (around 40) not seen since 2002. However, instead of putting in some sort of bottom it has blown away those levels, coming within a hair's breath of 80.

One thought on this is that the VXN (the volatility index for the NASDAQ) hit comparable levels during the dot-com bubble blowout. This time around, the focus is in the financial sector--S&P territory.

The financial media has attributed much of this recent decline to forced selling by fund managers due to redemptions. Certainly this is a big factor, however there is an issue that I'm not fully understanding in light of the VIX readings we are seeing. The VIX is calculated using prices on call and put options. As uncertainty in the marketplace increases, investors bid up the prices on put options as a hedge against a possible downward move. Institutions in particular can use puts to hedge an existing long position against short-term losses. However, if redemptions are forcing fund managers to sell assets and raise cash then certainly that explains the tanking of the indices, but it doesn't fully explain who is bidding up puts since a fund in need of cash would not shell out what cash it has to buy puts on long positions it wants to hold. What am I missing?

Let me toss out another idea. Every time a government wonk gets the great idea to stand up and let everyone know how hard they're "working" to fix things, the market drops 500 points. It seems to me that the market is skeptical that government intervention is a good thing. Let's not overlook the government's role in creating this mess or the fact that Henry Paulson, one of the "fixers", lobbied for the ability to over-leverage while CEO of Goldman Sachs. It is becoming apparent that more socialism is coming down the pipe and the market doesn't seem excited about it.