| | | marketwatch.com
Wall Street’s ‘fear index’ is on track for the biggest two-day jump since Trump’s election
Published: Feb 16, 2017 1:07 p.m. ET
MARKDECAMBRE
Don’t look now, but Wall Street fear is quietly creeping higher.
On Thursday, the level of a measure of volatility — sometimes described as the “fear index” — in the S&P 500 was on track to mark its largest two-day climb, nearly 18% at its peak at 12.86, since Nov. 3, when the CBOE Volatility Index VIX, -1.17% jumped nearly 19% over a two-session period, just ahead of the election.
The move, the gauge has since pulled off those highs somewhat, comes as all three major stock-market benchmarks, the Dow Jones Industrial Average DJIA, -0.13% the S&P 500 index SPX, -0.27% and the Nasdaq Composite Index COMP, -0.28% finished at record levels for a fifth straight session for the first time since 1992, underscoring a bullish trend for stocks underpinned by a combination of Trump’s pro-business proposals and improving corporate quarterly results and economic data.
The Vix’s recent rise has been a curious one, but not totally uncommon. That is to say, the fear gauge and stocks shouldn’t be rising at the same time.
The VIX gauge is derived from the prices of S&P 500 options 30 days in the future and usually represents implied volatility. Another way to think about it is as a gauge of the balance of supply and demand between options contracts that give investors the right but not the obligation to sell or buy the S&P 500. The lower the level of VIX the lower the demand from investors looking to buy protection compared with those aiming to sell insurance policies to protect against rapid changes in equities.
On Wednesday, the VIX jumped 11%, climbing even as markets were rallying. That doesn’t typically happen because investors tend to be sellers of protection as stocks rally, pressuring prices.
The VIX’s current level still leaves it below its historic average of 20 and just around 12, which still indicates a fair amount of complacency is predominant. Complacency means that a sudden shock, and needn’t be a big one, could jolt the VIX sharply.
There are a few explanations for the recent trading action.
The VIX is already flirting with multiyear lows and it doesn’t take much to push it back to higher levels.
Another view is that investors may be more prone to hedge their investments. Hedging or buying protection against losses is made somewhat easier by the relatively low price to buy protection that the VIX implies. But some investors also are starting to make wagers that stocks can’t climb much higher off their currently lofty levels and could be due for a fall.
Nick Colas, chief market strategist at Convergex, in a Thursday research note said he’s expecting the VIX to make a run higher but says part of the enthusiasm around stocks could be pinned to expectations that policies under the new presidential administration will foster economic prosperity.
“As a rule, when stocks go up, the VIX goes down. But if the current rally truly signals a new economic paradigm and outlook for U.S. corporate earnings, then we are in the first stages of a volatility reset. As investors and options traders understand that, the VIX and other equity market options prices will begin to reflect this shift,” he wrote.
Investor takeaway: In any case, it may be prudent to watch the VIX. |
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