A widely followed market measure of fear and complacency is signaling to investors that the debt default fears in Europe are contained, our economy is recovering just fine and there’s little reason to protect your investments against a coming collapse.
The Chicago Board Options Exchange Volatility Index is at its lowest level since May of 2008 and below its long-term average since 1990.
There are other factors involved, but the so-called VIX is calculated essentially by measuring puts being bought on the S&P 500 versus calls. The higher the level on the Volatility index, the higher prices are for put options, bets that the S&P 500 will go down.
Today the ‘VIX’ is nearing 17, below its long-term average of 20 and way off levels above 70 that it reached at the height of the credit crisis. The index is “considered by many to be the world’s premier barometer of investor sentiment and market volatility,” according to the CBOE’s web site.
“Risk expectations are slowly coming out of the market as equities rally and the VIX suggests this is going to continue despite Greece, the British Pound, health care, unemployment, etc,” said Scott Nations, President of NationsShares in Chicago. “Right now the options market saying, ‘all is right with the world or will be soon.’"
The rally in the stock market today after the somewhat positive jobs report came as no surprise to those watching the downtrend in the ‘VIX’ this week. But some investors beg to differ from the options market. They believe that while the measure may be back to its historical normal level, it’s way below a level that should be considered normal in this post-credit crisis world. The risks are still here, they’ve just been washed away temporarily by all the free money being given away by governments around the world, they say.
“High levels of global monetary stimulus and low interest rates quite literally push capital into risk assets, since there is no return available in risk-free investments,” wrote Nicholas Colas, Chief Market Strategist for BNY ConvergEx Group, in a note to clients this morning. It “reduces perceptions of risk in such asset classes.”
Colas believe investors are much too complacent and blindly buying all assets together, the same kind of mentality that took place before the bubble popped.
“Gold, stocks, corporate bonds…it’s all the same, so to speak,” wrote Colas, who is based in New York. Volatility “will return, either from an outside shock or because the world’s central banks begin to reduce the stimulus they introduced over the past two years. But it will return.”
As the ‘VIX’ fell below 20, Karen Finerman, President of Metropolitan Capital Advisors, started buying puts for protection on her portfolio. It’s just not a normal environment still and you have to protect your gains, according to Finerman, also a ‘Fast Money’ trader.
“Debt troubles in Europe or Japan or China’s real estate bubble” are the most likely scenarios for that ‘shock’, said Finerman.
For the best market insight, catch 'Fast Money' each night at 5pm ET on CNBC.
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Trader disclosure: On March 5, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Grasso Owns (TSO), (AAPL), (ABK), (ASTM), (BA), (BAC), (BGP), (C), (COST), (CSCO), (PFE), (PRST), (V), (WMT), (FAZ); Nations Owns (MSFT), (SPY); Edwards Owns (AAPL) For Clients; Edwards Owns (GLD) For Clients; Edwards Owns (SPY) For Clients; Edwards Owns (QQQQ) For Clients; Edwards Owns (MSFT) For Clients; Edwards Owns (GOOG) For Clients; Edwards Owns (GS) For Clients ; Jon Najarian Owns (AAPL), (AAPL) Call Spreads; Jon Najarian Owns (GS), (PCX); Pete Najarian Owns (BAC) Call Spread; Pete Najarian Owns (TEX) Calls; Pete Najarian Owns (CEPH) Call Spread; Pete Najarian Owns (AKAM) Call Spread; Finerman's Firm Is Short (IJR), (MDY), (IYR), (SPY), (IWM), (UNG), (USO); Finerman's Firm Is Long S&P Puts; Finerman Owns (AAPL); Finerman's Firm Owns (BAC), (BAC) Leaps; Finerman Owns (BAC) Preferred, (BAC); Finerman's Firm And Finerman Own (GOOG); Finerman's Firm Owns (WFC) Preferred; Kelly Owns (ELX) Calls; Kelly Owns (AMZN) Calls; Seymour Owns (CHL), (TSO)
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Stuart Frankel & Co. Inc. And Its Partners Own (TLM)
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Stuart Frankel & Co. Inc. And Its Partners Are Short (CL)
