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The Dow is a quick rally away from 13,000 and the S&P 500 isn’t far from its 2011 highs. But the biggest surprise of the year, according to at least one market analyst, is the sleepy stock-market fear gauge.
The Chicago Board Options Exchange’s volatility index, known as VIX, continues to meander under 20, roughly its long-term average. Even as stocks drift lower today, the VIX is only up a smidgen. And the longer the VIX stays below 20, the bigger the debate rages over whether the stock investors are acting calm or complacent.
The VIX uses options pricing to measure the market's expectations for future swings in the Standard & Poor's 500-stock index. It tends to rise when stocks fall and vice versa.
VIX was recently up 2.1% at 18.57, while the S&P 500 fell 0.4% to 1357.
Nicholas Colas, chief market strategist at ConvergEx Group, says the VIX has closed above 20 just twice over the last month. This price action is the “market’s equivalent of a dog sleeping in the sun,” he says.
“Even with the seemingly satisfactory conclusion of the Greek debt negotiations over the long weekend, markets should feel at least moderately twitchy about Iranian nukes, Chinese hard landings, the still sluggish U.S. economy, Fed policy, or any one of a veritable laundry list of potential troubles,” Colas says. “Have equity markets just grown used to exogenous events and/or policymakers' ability to control and contain them?”
Based on the VIX, the answer appears to be yes. Prior to 2009, the average time it took the VIX to register a close below 20 when it had previously been over 40 was 209 days, according to Colas. But the last two instances in 2010 and 2011 haven’t followed the same trend.
The VIX rose above 40 on May 7, 2010, a day after the “flash crash.” But it was back below 20 just 108 days later, underscoring how those jittery market conditions didn’t last long.
More recently, the VIX was above 40 on Aug. 10, when stocks were suffering their summer swoon. But the heightened anxiety was fleeting and the VIX returned below 20 only 111 days later.
“Equity and options markets are quicker to dispel thoughts of quasi-permanent risk now versus the historical norms,” Colas says. He offers three reasons why:
With complacency setting in and stocks still able to trickle higher, the big question is whether investors should still put more money into stocks at current levels.
Colas’ broad takeaway? Stay cautious.
“Even if stock and options players have learned to recover quickly from periods of stress (and that's still a big ‘If’), there is always another risk catalyst waiting in the wings,” Colas says. ”Levels do matter, and I'm as happy as anyone that the Dow is so close to 13,000. Its just that another number – VIX below 20 – worries me more.”
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Volatility and complacency are trend followers’ best friends as they trend better then any other index. stock ETF or commodity. See: http://www.allantrends.com/how-to-trade-vxx/
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