trader David Morrison VIX's long-term average 20

David Morrison Column



A number of markets have seen a big increase in volatility recently. Precious metals, base metals, grains, cotton, bonds and currencies have all experienced wild intra-day swings. This is understandable as the world is still struggling to deal with the fallout from the financial crisis which blew up two years ago. Investors have to factor in a huge number of unresolved issues every time they make a trading decision. The problems may appear obvious, but how they affect an individual market isn't.


In the US alone, unemployment remains unacceptably high; there is growing evidence that the residential and commercial property markets have further to fall; the recovery is so weak that earlier this month the Fed has announced a second round of debt monetisation; there is uncertainty over the costs of financial regulation, the expiring Bush tax cuts and healthcare costs; there is a growing scandal over illegal home foreclosures; there is talk of the fraudulent misrepresentation of mortgage-backed securities and the FBI has raided the offices of a number of major hedge funds as part of an intensifying investigation into insider trading.


Meanwhile, in the Asian Pacific region, there has been a breakout of hostilities on the Korean peninsula, and a sharp pick-up in Chinese inflation. The People's Bank of China has raised the Required Reserve Ratio for banks five times this year and investors now worry that the authorities could hike rates and curb government lending programmes. This leads to fears that China's stock and property markets are about to correct downwards.


Let's not forget Europe where the EU/IMF's attempt to force a bailout on Ireland is not going well. While the Irish government has finally, and reluctantly, accepted help, the political backlash could see the whole process unwind before it begins. In consequence, the euro is under pressure while the bond yields of Portugal, Spain and Italy are pushing higher as the risk of contagion gets priced in.


Yet with the exception of the Japanese Nikkei, most major global indices are trading near (or above) their highs for the year. While volatility is evident in numerous markets, it is strangely absent from equities, at least as measured by the CBOE's Volatility Index (VIX).


The VIX measures the volatility of the S&P 500 by looking at the 30-day forward prices of call and put options. A low number indicates that traders and investors are relaxed about future equity movements and are therefore happy to hold long positions. A high number indicates that investors are nervous and therefore willing to pay more for insurance. Currently, the December futures contract is trading around 20, which is pretty close to the VIX's long-term average and a lot lower than 33 where it stood at the end of August. This was before Ben Bernanke delivered his speech at the Jackson Hole Economic Symposium where he telegraphed the likelihood of a second round of Fed stimulus. The fall in the VIX corresponded to a rally in equities and risk assets in general.


Last week saw two back-to-back daily ranges of over 1.5% on the S&P, yet investors appear remarkably sanguine about the outlook for equities. Despite all the uncertainties surrounding the global economic outlook, they see a low probability of the US stock index falling before the end of the year, and this is reflected in the current reading of the VIX. The index hit an all-time peak above 80 in November 2008 following the collapse of Lehman Brothers. But if you're looking for volatility, you won't find it in equities - yet. Maybe it's a good time to pick up some insurance.

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• vix future premium level (图) -marketreflections- ♂ (1156 bytes) () 11/28/2010 postreply 14:15:48

• vix options premium level 11/15/2010 closing price (图) -marketreflections- ♂ (748 bytes) () 11/28/2010 postreply 14:18:56

• VXX：The put-call ratio is .25, normally considered bullish,but i -marketreflections- ♂ (1475 bytes) () 11/28/2010 postreply 14:23:26

• NYSE McClellan Summation Index,Transportation Average Index (IYT -marketreflections- ♂ (2855 bytes) () 11/28/2010 postreply 14:26:22

• trader www.advicetrade.com/nightlyreport (图) -marketreflections- ♂ (7745 bytes) () 11/28/2010 postreply 14:34:40