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Despite the concern about the economy, Greece, China, etc., and general sentiment readings, the VIX remians surprisingly low:

BusinessWeek: No Panic in Options After VIX Takes Six Weeks to Exceed Average

It took six weeks of equity losses, a series of lower-than-estimated economic reports and political turmoil in Greece to finally drive the options gauge known as the VIX above its long-term average. The Chicago Board Options Exchange Volatility Index rose 17 percent to 21.32 yesterday, topping its 21-year mean of 20.34 for the first time since March 21, according to data compiled by Bloomberg. The VIX averaged 17.44 since the Standard & Poor’s 500 Index, the benchmark measure of U.S. stocks, began falling after reaching an almost three-year high on April 29. The options measure failed to surge even after the Citigroup Economic Surprise Index sank to minus 117.20 this month, meaning data missed projections in Bloomberg surveys by the most since January 2009. The response shows there’s no panic among investors buying and selling equity derivatives. . .”

Jim Bianco of notes the following about the VIX:

“In both normalized measurements, the present VIX reading is just over its trend curve. This is a market simply unwilling to acknowledge anything unusual might be underway.

As the spate of negative economic news and the largest one-day selloff since August 2010 have not been kept secret, we have to conclude one of two things: Either the options market is correct or option buyers have been blinded by, well, blind faith. It is quite possible the latest spate of negative news is simply one in a series of crises since March 2009 that have generated a great deal of excitement and then were buried in the next rally. For more than two years, the the bears have made the headlines and the bulls have made the money, much to the consternation of the bears.

Still, as noted in March, it would be better to see a rising VIX in such a situation. What never has changed and never can change are the mechanics of market-making; each purchase of protection in the put options market or in floating-rate receiving on variance swaps demands market makers sell ever-greater quantities of stock at ever lower prices to hedge. If the present complacence is incorrect, the subsequent adjustment will be harder and more violent than it would have been otherwise.”

Category: Contrary Indicators, Markets, Psychology, Technical Analysis

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22 Responses to “VIX: Where is the Panic In the Markets?”

  1. bart7 says:

    Strange, put call ratio $cpce hit multi year extremes yesterday at 1.11.
    AAII sentiment index was at most bearish levels since July 201o bottom recently. Not seeing complacency in those indicators.

  2. nofoulsontheplayground says:

    I also noticed the CPCE yesterday hit an extreme last seen in November 2008. The S&P 500 put/call ratio was around 3:1, which suggests either smart money getting positioned for a greater drop, or closing of open put positions to prepare for a bounce. The latter is more probable due to the oversold market and extreme sentiment.

    I am watching the SPX to see if it moves towards a strike divisible by 25 tomorrow. Furthermore, a down op-ex week is typically followed by an up bias the first two sessions of the following week.

    The multi week down study BR showed earlier suggests bears should root for an up week this week and bulls should root for a down week.

  3. Bruman says:

    I don’t have access to the data, but I found myself wondering what the put-call ratio was doing too. IIRC, the VIX is priced off of both put and call prices. If one is way up and the other is way down because of demand imbalances, it might wash out (just a hypothesis here, I’d love to hear from more knowledgeable VIX-volk).

    But I have been wondering where the panic is. It’s seems more like a slow-ish deflation of asset prices than a 2008 style collapse.

    None of the things that are happening in the macro scene are things that were completely off of peoples’ radars. It may be the “pessimistic” scenario, but it isn’t the “surprise-catastrophe” scenario that the bank freeze was.

    Things that could become catastrophic are ongoing deadlock on the debt ceiling, resulting in a downgrade of US Treasury debt. This would ripple across the world in the form of (marginally) higher interest rates, and it is possible that certain institutions would have to replace large portions of their Treasury securities with something else (what else has the depth is an interesting question; Treasurys may be more important for their depth than their safety in the end).

    The other catastrophe is if European banks seize up to the point where businesses can’t function. But it is very difficult to believe that the Europeans haven’t at least considered what they would try to do if that happened… or the Germans, at least. The 2008 crisis was as much exacerbated by the “holy sh!t, WTF can we do in 48 hours, when we haven’t thought about the possibility of this happening at all” factor. A Euro-version might have the “holy cr@p” part down, but not the “we never imagined that this could happen.”

  4. ashpelham2 says:

    Maybe we’re all just reading too much into this whole thing, and it’s just a summer swoon like we see on a pretty frequent basis. The old phrase Sell in May and go away comes to mind, but the selling is about 2-3 weeks behind where it normally should be.

    That could also be a greater concern because volume USED to be lower in the summer months, but not anymore due to all the robo traders HFT computer programs.

  5. Bruman says:

    >but the selling is about 2-3 weeks behind where it normally should be…

    A bit like the weather this year… hmmm… ;-)

  6. gremlin says:

    I think a lot of people are just frozen with fear, deer in headlights. every few weeks a new disaster seems to loom, when even cash or money markets might not maintain value over time, it’s hard to make a change. When everything starts to lean in one direction, everyone will make a decision in a thundering herd.

  7. Lukey says:

    My guess is that folks are complacent because they figure it the markets get roughed up, it will just mean a quick implementation of QEIII (and they are probably right).

  8. Petey Wheatstraw says:


    I agree. It’s almost like synapses aren’t firing due to overstimulation/exhaustion.

    This is the Grigori Rasputin of markets. Despite being poisoned, shot (1 bullet), shot again (3 bullets), clubbed (and, still struggling), bound and thrown into the icy river to drown, it’s apparently making its way to shore, looking for a good party.

  9. Mike in Nola says:

    If you compare the current chart values with the late summer of 2007 just before the crunch started, the values don’t show a big diff. In fact, they were a little lower then.

    I think this is just an illustration of how far ahead most investment people look, or don’t look.

  10. DMR says:

    It is a common misperception that the VIX is a measure of pessimism…it is really a measure of uncertainty.

    In this scenario, the market has known about Greece for more than a year, it has known about debt since before the previous crash, etc. It looks like a steady downward progression as known risks come to bear, rather than an explosive change in sentiment as happens at a euphoric bubble top.

  11. Mike in Nola says:

    Pedantry follows:

    After seeing this post on ZH about how all the angst is not warranted based on a technical analysis of the markets.

    I noticed Charles Hugh Smith’s post today in my RSS reader here:

    What we are seeing is really the contrast between algorithims which are really just fancy technical analysis, and human understanding that can take into account things that are not modeled in the algorithms. Most everyone here sees that there is plenty that can go wrong and is very likely to go wrong: Greece, Ireland, the China bubble, and plenty of domestic problems. But the algos and tech analysis have no way of taking these into account. So, so the market continues on it’s merry way as if everything was normal.

    This is reminiscent of what I have read about what was going on in the big banks and hedge funds before the crash. There were plenty of general warning signs that things were going very badly financially and some perceptive financial people were warning of it, but inside the big banks, the hedge funds and the Fed, no one was listening because their VAR models and other statistical models were telling them everything was ok. Of course, the models couldn’t take into account what they hadn’t modeled and that was the failing. And, more importantly, as Prince said, when the music is playing, you gotta dance, even if you are headed for disaster.

  12. AHodge says:

    interesting questyion
    VIX not real low and rising little, but below 23 for example as boundary
    the forward VIX futures curve is also exceptionally low, meaning flat
    with far date only 3,5 above near date. with VIX below 30 the history is more lke a 6-10 range, really steep but throw out all you know about futures backwardation, not here
    this market techs look ugly

    but i am trying to say its mostly one month fear or less– which other indicators may be signalling
    not trend fear year end fear.
    my options council buddy thinking about VIX call spreads,
    i am thinking about VIX calendar spread, bet it resteepens at some point.

    but at this point just lookin for levels to sell TIPS big before buying back in stocks

  13. AHodge says:

    i dont think put/call holding ratio that determining
    and what universe is the ratio in?
    the small price deviations from equivalence more useful but not really….

  14. many moons ago I was reading how the VIX was being manipulated lower because it was so closely watched. I seem to recall that GS was somehow involved. I can’t remember the details now

  15. DeDude says:

    So as long as the selling is expected and people can see it coming from a mile away, it will not cause any panic.

  16. AHodge says:

    oops neardate VIS now almost 24
    but forward curve compresses to about 2

  17. nofoulsontheplayground says:

    Mike, sorry, but technical analysis measures price, volume, and momentum. All of those inputs are formed by humans, whether they are algorithms or individual trading decisions. These decisions often times form chart patterns that are the direct result of the human market interaction. Over the years, technicians like Bulkowski have studied and shown that these patterns have a high probability of a certain outcome. This is what T/A essentially is – probability and outcome.

    Technical analysis is useless if applied by someone who does not have a mathematical or logic based methodology. T/A uses patterns in charts formed by human interaction in markets to improve the probability of a successful trade. Those who practice it understand its strengths and limitations, and they make contingency plans if patterns break against the norm.

    Typically when I read people who rail against T/A, it is usually because they are more “story” based investors who are moved to trade or invest by fundamental analysis. Everyone should use the methods that work best for them without deriding another’s preferred approach.

    Furthermore, just because the market does not fit an individual’s particular bias or time frame does not mean the market is “wrong.”

    Technical analysis often times can “see” things before humans fundamental analysis can, both positive and negative.

    Trading is not about being “right” about the fundamentals. It’s about being “right” about the trend. Sometimes fundamentals are lined up with the trend, and sometimes they are not.

    Meanwhile, Mike, I suggest you get in the spirit and enjoy “quad witching” tomorrow.

  18. What is causing the market to roll over today?

  19. Super-Anon says:

    The downward movement in the markets almost looks methodological — like a mass calculated movement from buying to selling.

    But this represents a major political problem:

    In as much as high-end consumption has been a major driver of the economy in recent months, a major market downturn would make a recession very likely in the near future.

  20. bart7 says:

    VIX finally kicking in, 24.55 now and the market is only down a few points. What’s with that?

  21. brianinla says:

    Maybe big money has decided to not pay option premiums to hedge. Lots of other choices – index futures, single stock futures, sector ETFs, equity swaps. And with known circuit breakers established to try to limit daily downside action (except in precious metals, where there it’s acceptable) why buy long-dated options with a high premium? I think using the VIX is now a dead signal.

  22. zot23 says:

    It’s cute, the way we all discuss the market like it was free to find it’s own balance, or isn’t chained to the FED’s radiator with a QEx rope.

    I gave up on the market making any sense a year ago, the fix is in too deep to pretend I can compete.