Among Investors, Fear Seems to Be on Vacation

Sunday, 25 May 2014 07:11 PM

 

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Whatever investors are worried about right now, those concerns are not showing up in Wall Street's fear gauge. That scares some. On the other hand, it more than likely means that stocks will keep taking things slow and steady.

The CBOE Volatility Index, or VIX, closed on Friday at 11.36, its lowest level since March 2013. That means investors see less risk ahead, particularly with the S&P 500 ending at a record high again on Friday.

With the typically slow summer months just ahead and little on the horizon to shake the market from its current course, investors could be looking at even lower VIX levels, some analysts said.

"It's not that there's no likelihood of a correction. It's that people don't perceive anything to derail the train at this point," said Andrew Wilkinson, chief market analyst at Interactive Brokers LLC in Greenwich, Connecticut. "So I think people are beginning to wonder: Are we heading back to single-digit volatility?"

The S&P 500's record high and the drop in the VIX are not the only signs that fear is not a factor on Wall Street.

Volume is down as well. S&P 500 E-mini futures volume was below the 1.52 million daily average of the past year on every day last week except Tuesday.

The market's gain has come despite concerns about a slowdown in China and weakness in small-cap names. Typically small-cap stocks lead the market's advance when the U.S. economy is improving.

However, the recent selloff in small-cap stocks, which drove the Russell 2000 index briefly into correction territory in mid-May, seems to have slowed. The Russell gained 2.1 percent last week, its biggest weekly bounce in more than a month. The index is less than 7 percent below its record close of 1,208.65 in early March.

At the same time, the Dow Jones Transportation Average hit record territory late Friday, nearly breaking above the 8,000 level.

"One of the reasons the VIX is so low, we haven't really done anything this year. We haven't moved an awful lot," said J.J. Kinahan, chief derivatives officer of TD Ameritrade in Chicago.

For the year, the S&P 500 has gained just 2.8 percent.

To be sure, some analysts say the lack of volatility suggests a complacency that could encourage excessive risk-taking. New York Federal Reserve Bank President William Dudley and Dallas Fed President Richard Fisher have both expressed such concerns in recent days.

"The lower the VIX, the more overbought the market gets, leaving it vulnerable to some kind of setback," said Donald Selkin, chief market strategist at National Securities in New York.

But the lack of volatility is also showing up in the foreign-exchange and commodities markets, according to Bespoke Investment Group analysts. They noted lower implied volatility in options in the foreign-exchange market as well as recent stability in the PowerShares Deutsche Bank Agriculture Index exchange-traded fund.

"If the VIX index is pricing in too little volatility, then why is it wrong to do so?" Bespoke analysts wrote.

© 2014 Thomson/Reuters. All rights reserved.

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