Fear Gauge is rising but bottom still not here
Reuters Market News
By Haitham Haddadin
NEW YORK, June 26 (Reuters) - Wall Street's "Fear Gauge", a measurement of how jittery stock investors are, is rising but has not yet hit the panic levels that usually signal a bear market bottom.
"Capitulation has to have the same level of fear as we had at the September lows," Robin Griffiths, chief technical strategist at HSBC Securities, told Reuters on Wednesday. Capitulation is Wall Street speak for a cataclysmic selling that marks the bottom of a bear market.
The markets are not quite there yet, experts say, even as revelations that telecom provider WorldCom Inc (NasdaqNM:WCOM - News) overstated financial results by as much as $3.8 billion further undermined investor confidence in financial markets and Corporate America. Professional investors gauge fear by looking at the Market Volatility Index (CBOE:^VIX - News), introduced by the Chicago Board Options Exchange (CBOE) in 1993. The VIX measures the implied volatility of the U.S. equity market, or how much up or down investors expect the market to go.
The index, which spiked to a high of just over 57 on Sept. 21 when stocks carved out three-year lows in the post-attack trading week, rose 9 percent to 34.4 on Wednesday as global stock markets fell to levels unseen since the immediate aftermath of the Sept. 11 attacks.
"If the recent selling was a capitulation low you would see this index between 40 and 60 and it has not done that yet," Griffiths said. "That's where we went after the Sept. 11 attacks."
The fear index is calculated in real-time by measuring the the premiums of short-term options on the Standard and Poor's 100 Index (CBOE:^OEX - News). Its sister index, the VXN (CBOE:^VXN - News), measures the volatility of the tech-laden Nasdaq 100 stocks index (NasdaqSC:^NDX - News). The VXN has risen to the mid 60s from 40s. It has to spike to the 90s, levels hit in the post-Sept. 11 sell-off, for a market bottoming process, say analysts.
PESSIMISM OR OPTIMISM
Both VIX and VXN are contrarian measures. When they rise, they reflect crowd pessimism, and when they sink, they point to crowd optimism. Chartists use the extremes of these emotions, defined as "complacency" and "capitulation" as turning points in the market
"If the VIX goes lower, stocks go higher and if it goes higher, stocks go lower," said Philip Ruffat, senior vice president of the futures division at Mizuho Securities,
"The VIX has a rolling average of about 27 for the last five years. Every time it fell significantly, say to 16 or 17, within 90 days we start reversing the trend."
Technical analysts who track this popular measure say even at its current high levels, the index is not flagging the low water mark for the vicious bear market that began in early 2000. They expect an uptrend after capitulation, when investors dump the market lock, stock and barrel.
"Capitulation is never small, it is always deep," Ruffat told Reuters. "What we are looking for in the VIX is a spike, it has to be pronounced; a move over 50 like back at the September lows in stocks.
"That means that finally the hot money is out and those who should not be in the market in the first place are shaken out. You are left with real investors," he said. "In the next couple of weeks, we expect the VIX to spike back to near 50 or so."
Stocks slumped on Wednesday, with the tech-packed Nasdaq market hitting a 3-1/2 year low, as WorldCom's restatement shocked an already unsteady Wall Street.
The broad S&P 500 index fell to 1.8 percent to 958.53, a level unseen since late September after the devastating Sept. 11 attacks. The Nasdaq Composite (NasdaqSC:^IXIC - News) fell 1.96 percent, to 1,396.13. The index plunged as low as 1,375.53, an intraday trough not seen since Oct. 8, 1998. If the index closes below 1,419.12, its Oct. 8 close, it will end at a five-year low.
"Now the average American thinks 'I am disillusioned with stocks, but I am not canceling my 401(k) and thank God I have a roof over my head,' That's despondency," HSBC's Griffiths said.
"In capitulation, he will be saying: 'I am going to cancel my (Charles) Schwab account and I am closing my 401(k)."
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