On Monday, we showed a one year chart of the VIX versus SPX. We noted that the VIX had stayed
relatively modest, implying that a tradable bottom had not yet been made. On Tuesday, we noted the longer term, 10 Year VIX versus SPX.
It felt like a panic. As the Dow Jones Industrial Average tumbled to a 2008 low, spooked investors flocked to the relative shelter of Treasury bonds. Gold, another place where investors search for safety, also jumped in price. In all, the moves were reminiscent of wild selloffs in January and March.
But something’s different this time. A key panic gauge is still relatively cool: the Chicago Board Options Exchange’s volatility index, also known as the VIX. This is a measure of how much investors are willing to pay for stock options, which they can use as protection in times of uncertainty. It tends to rise in worrisome times.
The VIX did jump Thursday to 23.93, a one-day gain of 13%. When stocks were selling off in January and March, the VIX went even higher — closing above 30 each time.
The most-watched gauge of price swings in U.S. equities indicates stocks have further to fall after the Dow Jones Industrial Average declined to the lowest level since September 2006.
The Chicago Board Options Exchange Volatility Index, or VIX, rose 13 percent to 23.93 yesterday, leaving it 26 percent below the 2008 high. The Dow is poised for the worst June since the Great Depression after record oil prices and credit-market writedowns sent the average to its biggest drop in three weeks…
The volatility index, which traders sometimes use to forecast price changes in the Standard & Poor’s 500 Index, closed above 30 for the first time this year on Jan. 22 after stocks retreated to a 16-month low. The VIX reached a five-year high of 32.24 on March 17 when the S&P 500 traded at its lowest level of 2008, the day after the Federal Reserve led a bailout of Bear Stearns Cos.
The VIX is derived from the cost of options used to protect against declines in the S&P 500 and usually increases when stocks slip. Its climb above 30 in January and March marked bottoms for the benchmark index for American equities and preceded rallies of 3.3 percent and 7 percent in the following months.
VIX Picks Up But Not to Level Of Stocks’ Licks
WSJ, June 27, 2008; Page C1
VIX 26% Below 2008 High Points to U.S. Stocks Drop
Elizabeth Stanton and Jeff Kearns
Bloomberg, June 27 2008
The Fed is walking a tightrope between inflation and a recession, hoping to find its way to neutral. Bill Gross, of PIMCO, shares their insight.
"There’s a lot of stress in the
financial markets. Let’s face it, this economy, the US economy and
even the global economy is delevering, and when an economy delevers there are
substantial problems and substantial risks.
"We’ve seen a lot of that. We’ve
seen writeoffs in the hundreds of billions of dollars with more to come. But
yeah, there’s a lot of tenuous action in the financial markets these days and I
expect more of it."
Gross: Fed Will Hold Steady for Rest of Year
CNBC.com | 25 Jun 2008 | 03:20 PM ET