S&P 500 – Where is the fear?
Fear is an unpleasant emotion or thought that makes us believe that something bad is going to happen. In the stock market, fear leads to increase in volatility. Global stock markets are very volatile and that volatility is gauged by CBOE Volatility Index. Cboe Global Markets pioneered in gauging the volatility of stock markets and released CBOE Volatility Index – commonly known as VIX in 1993. VIX is the sum of probable upcoming volatility and the volatility risk premium.
After a lot of enhancement in the calculation methodology, today VIX is the most important index in the US equity markets to gauge the volatility. VIX, a tradable index, indicates one-month implied volatility built from S&P 500 option prices across a range of strike prices.
Traders and investors utilize VIX futures to hedge their market positions or take risky exposures in volatility through the VIX index.
In simple terms, high volatility tells that something big is going to happen in the markets, be it good or bad. The higher the reading, the probability of a major market moving event increases in the short term.
As the chart above clearly shows that, in 2007 the index indicated lowest fear which was beaten three times in 2017. In 2018, the index has again shown too less signs of volatility on the back of strong investor confidence and gradual interest rate hikes by the US Federal Reserve.
Looking the VIX index, there is no fear in the US markets, nothing big is going to happen and investors’ emotions are the right place.
But are they really expecting nothing big? Some major issues (other than corporate earnings and economic reasons) to hit the US markets in coming months are—
- US-China Trade Talks
- NAFTA Settlement
- Donald Trump’s impeachment speculations amid Mueller probe
- The Senate elections in November 2018
- The US-Russia/Iran/Turkey/Syria/North Korea sanctions and war-like situations