The CBOE Market Volatility Index (VIX) jumped almost 13 percent on Monday, reaching its highest level since June, as the market raced to price in equities risk in the face of a deteriorating outlook in the Spain and Italy.
VIX, which is based on S'P 500 Index option prices to measure the market’s expected volatility over the next 30 days, is often call the “fear gauge.” That means a spike in VIX is a clear reflection of growing market jitters. Early Monday, VIX hit a high of 20.49, more than 25 percent above its Friday close of 16.27. It ended the day around 18.34.
Exchange-traded products such as the $1.66 billion iPath S'P 500 VIX Short-Term Futures ETN (VXX)—the largest VIX-based ETP in the market today—was trading 5.8 percent higher early Monday, and was likely heading for IndexUniverse’s top-performers list . It had been almost 10 percent higher earlier in the session.
The broad stock market is clearly on edge, following weekend reports that several Spanish regional governments are now looking for a bailout from Spain’s federal government. The Dow Jones industrial average was trading sharply lower, giving up as more than 200 points early in the day. By late in the session, the Dow had retraced most of its early losses, and was 86.24 points lower, or down 0.7 percent, at 12,737.47.
The market seems to be saying that a $100 billion euro bailout of Spain’s banking system announced on Friday is probably not enough to save that economy if the entire government is in need of help. Ultimately, a full-fledged Spanish government bailout would likely drain all of the eurozone’s shared funds set aside for helping its members, although no one has yet put a price tag on that.
Spain’s borrowing costs on 10-year notes climbed to 7.57 percent Monday, after reaching 7.28 percent on Friday. Any rate above 7 percent the Spanish government must pay when it issues debt is widely considered unsustainable. The euro, meanwhile, sank to a two-year low relative to the U.S. dollar at $1.2067.
The iShares MSCI Spain Index Fund (EWP), the only ETF targeting Spain, slid some 1.4 percent to hover around the $20.80-a-share level. It has lost upward of a third of its value this year and a half in the past year.
Not As Bad As It Seems?
But what may seem at first blush as a huge VIX move doesn’t look as impressive in historical perspective.
“The VIX is pretty much moving based on what kind of sellers we’ve seen in both domestic and international equities ETFs,” an ETF trader told IndexUniverse on condition that he remain anonymous. “The move looks ugly, the graphs of the futures look ugly, but it’s not that big of a move at all.”
“The S'P is bouncing within its range—with no real panic that we’re seeing. If it broke the 1325 level, we’d start getting concerned. But up here we’re not really concerned,” the trader added, saying he sees technical resistance at about 1380.
The S'P 500 also bounced off its lows for the day, and was trading around midday Monday at 1,351.94, or about 0.8 percent lower.
From a historical perspective, VIX has been trading at relatively low levels, especially in the face of mounting uncertainties over global economic growth.
It was up above 25 in June, and last summer, when the market was digesting the U.S. credit downgrade, the index hit 48.
Most dramatically, during the height of the credit crisis in 2008 and 2009, VIX was trading around 80, a level that makes Monday’s reading of below 20 look decidedly less impressive.
Other technical indicators could also be behind Monday’s spike, such as VIX’s drop below historical actual realized volatility last week, something that doesn’t happen very often and suggests the market was being less than cautious, as pointed out by Schaeffer’s Investment Research .
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