With Bin Laden News Comes Surge in Fear Trade
Osama Bin Laden is dead, manufacturing is improving, earnings results have been great…all is well with the world. Right?
Maybe not, at least if you’re asking options traders, who were making heavy bets Monday that trouble could be on the way.
Almost all of the market’s main volatility measures—the CBOE VIX and VXN in particular and the new kid on the block, the SKEW—all reflected trader unease that despite the euphoria over the al Qaeda leader’s death, much unease remains.
“I’m not buying into this story,” says Andrew Wilkinson, senior strategist at Interactive Brokers. “This is somebody that this country has hunted down for a decade. I’m not convinced that he single-handedly plotted much more than the 9/11 terror event. So I don’t get why this would be such a big risk-on day as people tried to make out earlier.”
Indeed, with the relief that Bin Laden is dead came concern that the extremist terrorist groups that sympathized with his cause might be preparing a retaliatory attack.
Couple that with continued unrest in Libya and worries over U.S. inflation, and the Bin Laden news, while a massive boost to patriotic pride, ultimately only served as a reminder to how unstable the world finds itself.
“The euphoria over Bin Laden is only going to last a couple of hours,” says Keith Springer, president of Springer Advisory Services in Sacramento, Calif. “It has no effect on the financial markets whatsoever.”
Afternoon trading did reflect that the military victory’s fervor was short-lived in the financial markets.
The major averages ceded virtually all their earlier gains, and the weak-dollar trade was back on as the greenback fell narrowly against a basket of foreign currencies.
The VIX, which measures uncertainty in the Standard & Poor’s 500 over a 30-day period, and its Nasdaq-centric cousin, the VXN, surged into the afternoon. The VIX was at an anemic sub-15 level entering the day.
The VXX, which is an iPath exchange-traded note that takes the VIX out another month, also rose, while the SKEW, an instrument the CBOE implemented this year to gauge the probability of unusual events—often referred to as Black Swans—was at an elevated 127.45.
At the same time, dollar weakness invigorated the commodities trade, with gold and oil both off depressed earlier levels and trending toward positive numbers.
To some, the heightened fear of the day was another reason to distrust fundamental analysis of a market driven almost solely by Fed liquidity and the vagaries of technical levels.
“There’s so much news to be processed in so many different places that to try to figure out what’s driving the markets would be like chasing your tail,” says Adam Mesh, CEO of the Adam Mesh Trading Group in New York. “More than ever now is the time to rely on technical analysis and let the numbers show you the way.”
Jeff Cox is co-author, with Peter J. Tanous, of the just-released Debt, Deficits and the Demise of the American Economy (John Wiley & Sons).
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