"Fear Gauges" Strike Again

fear gauge

Tuesday, October 18, 2011

The "Fear Gauges" marched higher yesterday, particularly volatility-linked exchange traded funds along with the CBOE Volatility Index. TVIX was the biggest gainer with 17%.

Volatility-linked exchange traded funds jumped along with the CBOE Volatility Index on Monday as investors scrambled for insurance in options markets against further stock declines.

Not too surprisingly with equities sliding on Monday, the ‘"fear gauges"’, which includes the volatility tracking ETFs and their sister exchange-traded notes are back leading the charts of top gainers.

The Dow Jones Industrial Average (DJIA) shed 247.49 points, or more than 2.13% to finish at 11,397, on sinking optimism over a solution to Europe’s debt crisis.

The S&P 500 (SPX) fell 23.72 points, or 1.94 percent, end at to 1,200.86. The Nasdaq (COMP) slumped 52.93 points, or 1.98 percent, to close at 2,614.92.

After posting a stellar rally in the previous week, all major indexes are now back in negative territory for the year and the "fear gauges" are starting to rampage again.

Due to these declines by the major indexes, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) rose 9.4% on Monday.


Meanwhile, VelocityShares Daily 2X VIX Short Term ETN (NYSEArca: TVIX), which provides 200% daily leverage, climbed about 17%.


The CBOE Market Volatility Index (VIX), one of the major investor "fear gauges", saw a big move and gained 16.75% or 5.15 points to 33.39 Monday. VIX, which tracks the expected volatility priced into S&P 500 Index (SPX) options, moved higher after the SPX lost 23.72 points to 1,200.96. The S&P is now testing a previous support area around 1,200.

Meanwhile, CBOE Market Volatility Index (VIX) options were actively traded heading into the expiration. While most October options contracts expire at the end of the week, VIX is unique because the expiration is on a Wednesday. Therefore, today is the last day to trade the VIX October contract.

Volume in the VIX pit on Monday was 220,000 calls and 104,000 puts. While October 35 calls and 30 puts were heavily traded heading into the expiration, December 40 calls were the most actives. 31,100 traded and some investors might have been taking positions in these upside calls on expectations for another spike in the VIX before year end.

Just two weeks ago, the VIX looked ready to rise past the 48 level, but a double-digit rise in the SPDR S&P 500 (SPY) pushed the VIX under 30, the lowest end of its range since early August.

The moves, by the "fear gauges", left such volatility measures near their longer-term averages as compared to similar periods that created big swings.

Therefore, instead of diverging into a significantly higher energy event, this shock simply reverted back to the historical mean.

Whether they’ll stay at lowered levels remains to be seen, however.

The VIX, one of Wall Street’s most of the ‘fear gauges’ most used by investors, was up double digits on Monday as it tested the lower end of its three month range. It is believed that Investor complacency into the end of last week, caused a failed break down though the range.

There may be some backing and filling over the next few days but overall the chart looks to be setting itself up for a rally back towards the top of the range. Such a move would of course reflect equity weakness.

101811-VIX failed breakdown

While volatility could swing either way as conditions remained cloudy, it is estimated that the VIX would tend to remain above 30 rather than fall appreciably lower in the short-term.

If this reaffirms the strength of the relationship between past and present cycles, then VIX “may trend lower in coming weeks, ultimately sustaining a decline below 25 that would mark the end” of the current higher-volatility “shock” felt by stocks in recent months.

That could be good news for stock investors since the VIX tends to drop during market upswings.

But much of that prediction is based on what happens in Europe as leaders scramble to fix the euro zone’s debt crisis.

“The VIX has spiked and is starting to normalize, along with other ‘fear gauges’. The question is whether peaks have been accomplished!”


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