Investors may be resigned to bear market, say analysts
Reuters 9 March 2009
(CHICAGO) Wall Street’s barometer of investor fear is surprisingly subdued.
More often than not, when the Chicago Board Options Exchange Volatility Index rises, the Standard & Poor’s 500 stock index is falling, or vice versa.
But in 2009, this inverse relationship seems to be out of sync and has prompted Wall Street analysts to remark on VIX’s unusual behaviour, which typically should be higher due to the daily weakness in the stock market.
US stock markets have continued to grind lower since the turn of the year, with the broad S&P 500 hitting 12-year lows before rebounding on Friday.
The VIX has been mired in a range between 38 and 53, up 26 per cent for the year, and closed on Friday at 49.33. The index is still far off the highs seen during the Wall Street panic last autumn, when it approached a near record 90 reading.
Some analysts have suggested the VIX is not moving as high as it should because there is a lack of fear in the market.
Investors have become complacent, almost resigned, to the daily grind downward of US stocks.
As a result, there is no rush to buy portfolio protection, which would drive up put index option premiums.
But some have another take on why the VIX is so restrained. ‘The VIX is restrained because the amount of puts being purchased is partially being offset by the sale of existing put positions. This is keeping premiums from rising sharply,’ said Scott Fullman at broker-dealer WJB Capital Group.
Calculated from S&P index option prices, the VIX measures the market’s expectation of future volatility over the next 30-day period. A spike in the VIX is often associated with a steep market drop and when investors, anticipating wide market swings, are willing to pay a greater options premium to manage risk.
Volatility has remained very subdued, even though the S&P 500 has lost nearly 200 points in the last month. The VIX was not even up 10 points during that time, said Larry McMillan at options research firm McMillan Analysis Corp.
For some reason, complacency and disbelief have accompanied this sharp market decline, Mr. McMillan said. ‘It’s unclear what has possessed so many traders to try to fight this decline - to bottom fish, to ignore breaking support levels and to refuse to panic.’
Mr. McMillan believes the market decline will end the same way as all others - with traders panicking and the VIX spiking upward.
After setting a new closing high of 80.86 on Nov 20 as stocks hit 11-year lows, the VIX fell to an intraday low of 37 on Jan 2 and has gradually crept to above a 50 reading.
‘The S&P 500 has been down 2 per cent almost every day, so there has not been one event that has heightened volatility and prompted traders to rush in and buy protection and inflate the level of the VIX,’ said Jamie Tyrrell, a trader at Group One Trading, a market maker at the CBOE.
‘This year there has been a litany of bad news, but not the shock of the magnitude that we saw when the VIX reached those heights back in October and November,’ said Srikant Dash at Standard & Poor’s indexes.
The weakness in the VIX may be an indication investors have become resigned ‘to the fact we’re in a bear market’, said Bernie Schaeffer at Schaeffer’s Investment Research. ‘If so, this probably means that a market crash is unlikely, but equally unlikely is a ‘V-shaped’ market recovery. And the bearish trend is more likely than not to continue.’
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Volatility index subdued despite market falls
Investors may be resigned to bear market, say analysts
Reuters
9 March 2009
(CHICAGO) Wall Street’s barometer of investor fear is surprisingly subdued.
More often than not, when the Chicago Board Options Exchange Volatility Index rises, the Standard & Poor’s 500 stock index is falling, or vice versa.
But in 2009, this inverse relationship seems to be out of sync and has prompted Wall Street analysts to remark on VIX’s unusual behaviour, which typically should be higher due to the daily weakness in the stock market.
US stock markets have continued to grind lower since the turn of the year, with the broad S&P 500 hitting 12-year lows before rebounding on Friday.
The VIX has been mired in a range between 38 and 53, up 26 per cent for the year, and closed on Friday at 49.33. The index is still far off the highs seen during the Wall Street panic last autumn, when it approached a near record 90 reading.
Some analysts have suggested the VIX is not moving as high as it should because there is a lack of fear in the market.
Investors have become complacent, almost resigned, to the daily grind downward of US stocks.
As a result, there is no rush to buy portfolio protection, which would drive up put index option premiums.
But some have another take on why the VIX is so restrained. ‘The VIX is restrained because the amount of puts being purchased is partially being offset by the sale of existing put positions. This is keeping premiums from rising sharply,’ said Scott Fullman at broker-dealer WJB Capital Group.
Calculated from S&P index option prices, the VIX measures the market’s expectation of future volatility over the next 30-day period. A spike in the VIX is often associated with a steep market drop and when investors, anticipating wide market swings, are willing to pay a greater options premium to manage risk.
Volatility has remained very subdued, even though the S&P 500 has lost nearly 200 points in the last month. The VIX was not even up 10 points during that time, said Larry McMillan at options research firm McMillan Analysis Corp.
For some reason, complacency and disbelief have accompanied this sharp market decline, Mr. McMillan said. ‘It’s unclear what has possessed so many traders to try to fight this decline - to bottom fish, to ignore breaking support levels and to refuse to panic.’
Mr. McMillan believes the market decline will end the same way as all others - with traders panicking and the VIX spiking upward.
After setting a new closing high of 80.86 on Nov 20 as stocks hit 11-year lows, the VIX fell to an intraday low of 37 on Jan 2 and has gradually crept to above a 50 reading.
‘The S&P 500 has been down 2 per cent almost every day, so there has not been one event that has heightened volatility and prompted traders to rush in and buy protection and inflate the level of the VIX,’ said Jamie Tyrrell, a trader at Group One Trading, a market maker at the CBOE.
‘This year there has been a litany of bad news, but not the shock of the magnitude that we saw when the VIX reached those heights back in October and November,’ said Srikant Dash at Standard & Poor’s indexes.
The weakness in the VIX may be an indication investors have become resigned ‘to the fact we’re in a bear market’, said Bernie Schaeffer at Schaeffer’s Investment Research. ‘If so, this probably means that a market crash is unlikely, but equally unlikely is a ‘V-shaped’ market recovery. And the bearish trend is more likely than not to continue.’
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