Tuesday, February 17, 2009

Equity prices test lows, but fear is far from its highs

If you were to just focus on equity prices, which are revisiting their November lows, you would conclude that the market is really afraid of the future. But the VIX index, which essentially measures the fear embodied in those prices, is way down from its October-November highs. I'm not sure if there is a message here, but it is worth highlighting with an update to this chart. If anything, it tells me that equity prices have some decent support here, if only because the degree of fear, uncertainty, and doubt has declined meaningfully in recent months.

10 comments:

Mark Gerber said...

Hi Scott,
I'm wondering if the lack of fear indicates support or a new leg down? During this crisis, the lows have been made on increased volatility spikes. Also, it looks like the S&P highs during this bottoming process (eg. 1000, 940) have been made during spikes down in volatility. Just an observation that echos the traders mantra that true bottoms are formed out of panic and capitulation.

Mark

Scott Grannis said...

You could be right, I don't claim to have a good understanding of this, and I'm not a market technician. But if we don't have a panic (i.e., a spike in the VIX) then why should we expect new lows? The November low came in the midst of outright panic and capitulation, but we seen none of that today. Just a drumbeat of bad news that has focused on how awful this "stimulus" package is. But really that is just a confirmation of all the things we worried about when Obama was looking like the winner.

ddt said...

I think a perspective is that it means investors are more comfortable with this level and, hence, comfortable with new lows. VIX won't increase until S&P 600 now. Takes more to shake people up these days. The folks selling now are logical sellers not panicked.

The Therapist Is In said...

Or it could mean that the VIX must also retest its November high. Where would the market be then? DK.

The Therapist Is In said...

Check out Mark Hulbert's Column,

http://www.marketwatch.com/news/story/Wall-Street-likely-fail-retest/story.aspx?guid=%7BFB91F881%2DDFC8%2D4137%2DAA09%2D97376AC65312%7D

Prospero said...

ddt comments may be a good explanation. See this commentary by Hussman Funds for a more elaborate explanation of something that common sense would tell you anyway. By the way, even though the commentary is interesting, the statistical modeling seems somewhat tortured to meet the argument.

http://www.hussman.net/rsi/valuationmoderation.htm

"As higher economic volatility comes at more regular intervals investors begin to expect that volatility and pay less for stock market earnings because they are less dependable over the near term."

Bernard said...

Vol was at an all time low before the recent collapse, no? The Global economy is teetering on a cliff. Our government has pledged some $9 trillion alone.

"In addition to the $152 billion Bush stimulus package in the spring of last year and the $700 billion Troubled Asset Relief Program (TARP) in the fall, the U.S. government has loaned, invested or committed $200 billion to nationalize the world’s two largest mortgage companies, Fannie Mae and Freddie Mac … over $42 billion for the Big Three auto manufacturers … $29 billion for Bear Stearns, $150 billion for AIG, and $350 billion for Citigroup … $300 billion for the Federal Housing Administration Rescue Bill to refinance bad mortgages … $87 billion to pay back JPMorgan Chase for bad Lehman Brothers trades … $200 billion in loans to banks under the Federal Reserve’s Term Auction Facility (TAF) … $50 billion to support short-term corporate IOUs held by money market mutual funds … $500 billion to rescue various credit markets … $620 billion for industrial nations, including the Bank of Canada, Bank of England, Bank of Japan, National Bank of Denmark, European Central Bank, Bank of Norway, Reserve Bank of Australia, Bank of Sweden, and Swiss National Bank … $120 billion in aid for emerging markets, including the central banks of Brazil, Mexico, South Korea, and Singapore … trillions to guarantee the Federal Deposit Insurance Corporation’s new, expanded bank deposit insurance coverage from $100,000 to $250,000 … up to $500 billion in Fed purchases of asset-backed securities … plus trillions more for other sweeping guarantees.

Grand total: Over $9 trillion … and counting!"

Throw in other central banks activities and you have a gigantic slush fund of corruption, zombie economies, and bubbles waiting to burst at the seams.

The VIX has already proven it's ability to miss the cue so I would be cautious at reading market indicators in a government run "market" economy...

Steve Grannis said...

The stock market is waiting for a rallying event but it's hard for investors to rally when they don't know what this Congress will -- or won't -- do to the private sector. Anything seems possible, meaning the dreaded unknown is constantly in play. The best thing to spark a rally right now may be for Congress to adjourn for the year.

Scott Grannis said...

Steve, shutting down Congress is the best solution I've heard so far.

Mark A. Sadowski said...

I'm sorry Scott but all this tells me that the losses will be slower than they have been in the past. In other words less volatility does not guarantee a bottom.