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This is the Vix — globally respected barometer of market fear:
But now count the peaks of fear.
One: International financial crisis. Two: Flash crash/European sovereign debt escapade. Three: The blink-and-it’s-already-over Middle East/Japan crisis?
Indeed.
Now, we’re not the first to notice that the Vix seems to be under-fearing the current crisis somewhat.
Dean Curnutt, President of Macro Risk Advisors, for one, has noticed too. And as he wrote this week:
Set against the backdrop of the global growth story, many argue the market has resumed its logical path higher, and that its ability to weather recent uncertainty speaks to the strength of the fundamentals. While the degree of stimulus offered by US monetary policy should not be underestimated, we believe recent events severely cloud the continued benign outlook for risk. Simply put, we think the market is substantially mispricing the degree of uncertainty that has materialized over the recent time period. We believe risk appetite is vulnerable.
So it’s almost like there are too many risks to factor in at the moment.
Curnutt lists the main ones as: Sovereign, Middle east, crude spike, US earnings, QE3, US fiscal adjustment, housing and general risk appetite.
But all in all the macro backdrop is littered with unknowns, he says.
In conclusion, the advisable action is clear:
Put together, we believe the market has become increasingly vulnerable to a "scare" "“ a bounce in risk premiums and decline in risk appetite that result from the inability to absorb the entirety of the uncertainty that currently plagues the investment landscape. Our recommendation is simple: with the VIX below 18 and with April ATM implied volatility at 16, "hedge when you can, not when you have to".
Hedge when you can. It applies to fear, too.
Related links: Vix and the Aussie dollar/yen cross "“ FT Alphaville Vix volumes rise could drive investor trends "“ FT Volatility as the new Black-Scholes "“ FT Alphaville
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