VIX Dips Below 13 as Dow Reaches Milestone of 14000
First Published Saturday, 2nd February 2013 04:53 am - © 2013 Dow Jones
--Market's "fear gauge" on track for sixth finish below 13 this year
--VIX futures suggest market's calm will persist into the fall
--VIX of 12.76 remains above recent backward-looking volatility measure of 10.76
NEW YORK--The market's so-called fear gauge greeted the Dow's 14000 with a rare dip below 13.
The Dow Jones Industrial Average's first move above that level since October 2007 boosted optimism in some corners of the market, as the Chicago Board Options Exchange's Volatility Index dropped toward a recent low that hadn't been seen since April 2007, a sign of unusual ease among investors.
"This isn't a sign of complacency in the market," said Todd Salamone, director of research at Schaeffer's Investment Research. "We've got a lot of measures at points that are important from a technical and psychological perspective. People were scared when the VIX was nearing 15 last year, but that ended up being bullish for the market."
The VIX is calculated from the prices that investors are willing to pay for protective options tied to the Standard & Poor's 500-stock index. It was recently down 1.36 points, or 9.5%, at 12.92. The fear gauge dipped below 13 Friday morning in the same minute the Dow touched 14000 for the first time in several years.
From the onset of the financial crisis through late last year, the 15 level had largely acted as a floor for the fear gauge, with each dip below that level being very short-lived. The VIX moved below 15 at the beginning of this year and has held there since.
On Jan. 22, the VIX finished at 12.43, the lowest closing level for the index since April 20, 2007.
The VIX snapped a 17-session streak below 14 earlier this week, climbing to 14.32 on Wednesday and finishing at 14.28 Thursday. But extremely low readings of volatility seem to be enduring, with the VIX again falling below 13 Friday. A low VIX suggests investors are less afraid of market swings over the next month.
So far this year, the VIX has averaged just 13.47, well below the fear gauge's 20-year average of 20.68 but in line with recent market volatility. A 30-day backward measure of volatility similar to the VIX's 30-day forward reading fell to just 10.76 Friday.
"Sometimes things just make sense in the markets. Why is the VIX at this level? Maybe the answer is, "Because it should be," " said Brian Overby, senior options analyst at online brokerage TradeKing, referencing past readings of volatility. "We have just hit a five-year high in the [S&P 500 index], and there is no imminent fiscal cliff, European debt crisis, election or weather anomaly within sight."
And VIX futures suggest investors expect low levels of volatility to extend at least to October, with all nine currently available futures contracts trading below the VIX's long-term average.
Front-month February contracts slipped 5.6% to 14.07, while the longest-dated contracts available, October futures, held steady at 20.05 Friday.
Investors typically pay a premium for volatility insurance in the future because of the general uncertainty about what may lie farther in the distance. The values of VIX futures tend to decline as the contracts near expiration.
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