When NPR’s update of the day’s headlines mentions the stock market’s lack of volatility, conditions must be extraordinarily calm. Such is the case right now. The Chicago Board Options Exchange’s Volatility Index (the CBOE’s VIX)—an obscure index to those who don’t focus on the financial markets—made the morning news. While most investors prefer calm conditions to turbulent ones, the current lack of volatility can distort the sense of how much risk an investor feels comfortable with taking. I’ll explain why this is a danger momentarily, but first I want to put the current state of calm into perspective.
Called the stock market’s “fear index,” the VIX ended Monday at 9.77. Not only was this the lowest close since December 1993, it was only the 11th time the VIX has closed below 10.0 since the CBOE launched the index in 1993. To give you a sense of how low this number is, the median closing level for the VIX over its entire history is 17.70, based on data from the CBOE. (The average is 19.57, but this number is skewed higher by the financial crisis when the fear index closed above 80 on both October 27 and November 20, 2008.)
The VIX is a measure of the implied or expected volatility of S&P 500 options over the next 30 days. Implied volatility is the market’s estimated future volatility. In layman’s terms, the VIX tells you whether traders are paying a little or a lot to protect their portfolios against a downward drop. Think of the VIX as tracking the cost of insurance with variable premiums; the more you perceive the risk of danger occurring, the more you are willing to pay to protect yourself against damage. The same logic applies to the VIX; the more fearful traders are, the more they are willing to pay for protection and the higher the index will be. Continue Reading »
More on AAII.com
- CBOE’s Volatility Index – Wayne Thorp explained in greater detail what the VIX measures and how investors can use it.
- Re-Examining Risk Tolerance Using Worst Case Scenarios – Though written in 1998 by former AAII Journal editor Maria Crawford Scott, this article provides a good overview of how to use worst-case scenario analysis to determine your tolerance for risk.
Highlights from this month’s AAII Journal
- The Trinity Portfolio: Combining Diversification, Tilts and Trend-Following – Meb Faber shows how buy-and-hold and a more tactical trend-following strategy can be combined into a single approach.
- What’s Your Investing Edge? – Investors’ biggest advantage comes from being able to take a long-term view.
AAII Sentiment Survey
Neutral sentiment rose to a six-month high. At current levels, all three sentiment indicators remain within their typical ranges. More about this week’s results.
- Bullish: 32.7%, down 5.3 points
- Neutral: 37.1%, up 5.1 points
- Bearish: 30.2%, up 0.3 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
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The Week Ahead
First-quarter earnings season shifts to the retailers. Twenty members of the S&P 500 are scheduled to report, including Dow Jones industrial average components: Home Depot (HD) on Tuesday; Cisco Systems (CSCO) on Wednesday and Wal-Mart Stores (WMT) on Thursday.
The week’s first economic reports will be the May Empire State manufacturing survey, the May housing market index and March Treasury international capital, all of which will be released on Monday. Tuesday will feature April housing starts and building permits as well as April industrial production. The Philadelphia Federal Reserve’s May business outlook survey will be released on Thursday.
Two Federal Reserve officials will make public appearances: Cleveland president Loretta Mester on Thursday and St. Louis president James Bullard on Friday.
The Treasury Department will auction $11 billion of 10-year Treasury inflation-protection securities (TIPS) on Thursday.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!
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