Wednesday, February 8, 2017

What's wrong with the VIX?

Mid-week market update: Increasingly, I have seen cases being made for an equity market correction. This Bloomberg article, "Five charts that say not all is well in the markets" summarizes the bear case well.
  • Uncertainty is at a record high: The number of news stories using the word "uncertainty" is surging.
  • Wall Street vs. Washington: While the Global Economic Uncertainty Index is elevated, the VIX Index remains low by historical standards.
  • The price of hedging tail-risk is rising: Even as the VIX remains low, the CBOE SKEW Index, which measures the price of hedging extreme events, is high. Which is right?

  • Gold is rising: Gold is often thought of as a safe haven in times of stress and the gold price has recently been inversely correlated with equity prices.

  • Watch for gold and bond yields to rising together: "Gold may prove the “tell,” according to Chris Flanagan, also at Bank of America. He advises investors to watch “for the combo of rising yields and rising gold prices to signal impending market volatility.” Three consecutive quarters of rising benchmark bond yields and gold prices preceded previous market falls including the 1973-1974 bond market crash and Black Monday in 1987, he says. The yield on the benchmark 10-year U.S. Treasury has risen to 2.44 percent from 1.77 percent since Trump’s election win. Gold has moved sideways."

Much of the anxiety can be summarized as, "What's wrong with the low level of the VIX Index? Isn't the VIX supposed to be a fear gauge?"

Why are't stock prices falling if actual fear is so high?

The full post can be found at our new site here.

No comments: