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The Volatile Fear Gauge

Written By Brian Hicks

Posted July 31, 2010

Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.

Ignore the economists and analysts telling us a double dip isn’t likely…

They missed the last one. So why would you believe them now?

Tell me, do you need any more proof that the economy is in trouble?

More importantly, do know how to profit from the ensuing volatility, as all goes down the toilet, using a no-options options trade?

Why are investors so worried?

“What has been gratifying is the fact that the economy now is starting to stabilize and grow again,” Obama just told “The View.” But it’s just not true.

Bernanke told us three weeks ago “We’re in a continued recovery… that just ‘won’t feel terrific’.” But that’s not true, either.

And from the look of the Fed’s Beige Book, he’s beginning to understand as much:

Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years.

… Meaning they finally understand there’s no easy path to recovery… That we can’t continue to kick the can down the road and ignore growing and unsustainable debt levels… That a recovery is at least five years away.

There’s even growing fear that scheduled 2011 tax increases could result in an 8.6% drop in the S&P 500, according to Barclays.

And there are still indications of another dip

Just what’s gutting the housing market, sending consumer confidence down the toilet and killing whatever recovery chances we had?

Simple: The “recovery” was nothing more than a figment of the Fed’s imagination — a mirage of massive bailouts, stimulus programs, and dollar printing.

Sure, we saw GDP growth… Big deal.

The core problems that took us into the last recession are still there.

They never went away. Close to 20% (real number) of America is unemployed; consumer confidence is fading.

Even Bernanke has to see a crippled housing market, stuck in a depression…

And an indicator with a 40-year history of calling recessions just said we’re falling into recession. Yep, the trusted Economic Cycle Research Institute weekly leading indicators fell as low as -10.5.  Every time this indicator has fallen under -10% since its 1967 birth as an indicator, a recession has followed.

Investors aren’t as stupid as the White House and Fed believe. They know what’s happening.

But many don’t know how to profit from it…

Here’s how to profit — and you have to jump on it NOW

A great tool for defining tops, bottoms, and reversals has been the CBOE Volatility Index (VIX) — a measure of fear in the market that can tell us how optimistic or pessimistic investors are.

When the VIX climbs, fear is rising; when it falls, fear is falling.

(For example, during the recession of 1998, the VIX jumped to its highest level. After September 11, 2001, it hit another extreme high — meaning fear was rampant, and rightfully so.)

For options traders, the VIX also helps determine the premium for options. With higher volatility, options traders pay more to reduce risk of using options.

This past week, the VIX fell to 23 — its lowest level since April. That, after the last “flash crash” of May 2010 sent it from 23 to 40 in just hours. I’m sure you remember. It also took premiums down on options, meaning it was a good time to buy options.

And since we see more volatility ahead, given the double dip and apocalyptic realities I’ve detailed in these pages before, you can profit from the VIX without having to buy options.

Instead, you can buy the Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX) around $23. It rises with the VIX. It shot up about 50% in May when the market flipped out over the European debt crisis.

Use it again here… as the market loses whatever is left of its mind.

But this isn’t the only way to profit these days… Found below are a few of best investment insights from the pages of this week’s top-read articles in Wealth Daily and from our sister publications, Energy & Capital and Green Chip Stocks.

Stay Ahead of the Curve,

Ian L. Cooper
Wealth Daily

Apple Hits Peak Profitability: Little Upside Left in AAPL
Wealth Daily Analyst Adam Sharp explores the possibility that Apple has reached peak profitability, with higher costs and competition looming.

The End of the Bush Tax Cuts: The Hammer is About to Fall
Editor Steve Christ examines the end of the Bush tax cuts and explains why it won’t be painless.

Energy and Metals Outlook for 2010: How to Invest for the Rest of the Year
Energy and Capital Editor Ian Cooper assesses the success of energy trades in the first half of 2010, and offers two ways to turn a profit in the second half

Energy Bill Opportunities: How to Profit from Cowards and Thieves
Green Chip‘s Jeff Siegel discusses opportunities stemming from the latest energy bill.

Easiest Way to Make Money — Ever: The Guide Your Broker Doesn’t Want You to See
Most people think profiting from options requires years of investment experience or a seasoned stock broker. That’s why people are losing thousands of dollars everyday. Our in-house options expert has put together a FREE guide detailing an options strategy that’s so easy, he’s calling them “automatic options.” You’ve got to check this out… and not just for the free trade.

The Decline of the U.S. Dollar: And the Perfect Scenario for Rising Gold Prices
Energy and Capital Editor Greg McCoach gives the hard facts about the future of the U.S. dollar and recommends two ways to minimize the wealth damaging effects of the collapsing greenback.

Korean Nuclear Reactors in the U.S.: No Mushroom Cloud, Just Exploding Profits
Green Chip Editor Nick Hodge discusses Korea’s APR-1400 nuclear reactor and one tiny company’s plan to import it.

The Nuclear Story Fox Isn’t Telling: They Only Reported the Facts… Here’s the Rest
Fox News published a story about the re-zoning of land in Idaho for nuclear reactors to be built. The piece discussed how many jobs will be created, when construction could begin, and how much land will be required… They even revealed which company is the major player in all of this. But what they didn’t tell you could make you more than $32k in the coming months.

Clean Energy Mergers & Acquisitions: When Cleantech Came of Age
Editor Nick Hodge discusses cleantech mergers and acquisitions in 2010 and lists a ton of clean energy stock tickers.

605% Gains in Just Weeks: How a Mongolian Oil Company Could Make you Filthy Rich
Once the news hit the mainstream on what this company found, the stock jumped 42% in what seemed like minutes… And this is just the beginning of what could be a HUGE run. I’m talking about the possibility of an easy 10-bagger here. Don’t be left out in the cold when this one explodes.

Herpes, The Jersey Shore, and Trading Secrets 11-20: Snooki Rings the NYSE Bell
Wealth Daily‘s Christian DeHaemer connects the Jersey Shore with herpes and, as promised, brings readers #11-20 of his trading rules.