Tags: VIX | volatility | uncertainty | sequester

Despite the Uncertainty, Volatility Still Low

Tuesday, 05 Mar 2013 07:42 AM

By Rick Pendergraft

One of the axioms you will hear most frequently about investing and, in particular, the stock market is that “the market doesn’t like uncertainty.”

Over the last few weeks and in the weeks ahead, there are number of uncertainties facing the market.

First we have the sequester that went into effect on Friday, which means $85 billion in government spending cuts. We also have the next debate regarding raising the debt ceiling again, which will likely come up by the end of March.

Despite these uncertainties, volatility is still close to historically low levels as measured by the CBOE Volatility Index (VIX).

The VIX closed above the 15 level on Friday and that was the first weekly close above this level since the last week of December.

The last time the VIX saw such a long stretch of weekly closes below the 15 level was in the summer of 2007, right before the credit-induced bear market of 2007 through 2009.

While I don’t think we are headed for another bear market like the one we saw six years ago, I am concerned that investors are too complacent.

Last week’s adjustment to fourth-quarter gross domestic product showed that our economy grew 0.1 percent. Much of the blame for the low reading was placed on the impact of Superstorm Sandy, but I don’t think that is the lone problem.

Flash ahead to the first quarter of 2013 and we see that consumers are dealing with less take-home pay thanks to the payroll tax cuts expiring and now you have $85 billion in spending cuts by the government.

The combination of all these factors doesn’t make me comfortable and I can’t figure out how or why the VIX is so low.

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