Date: 18 Jun 2014, Economics and Finance
Question setter: Mettletest Panel

VIX - Market Sentiment

Are stock market investors too complacent - Will The CBOE Volatility Index (VIX) close above 14 during July 2014?


Answer: Yes
Confidence level: 55%
Mean confidence level (all requests): 26.25%

Over the last 10 years, the VIX has averaged near to 20 with the closing price ranging between 9.89 and 80.06. Remaining this low in the range for more than 2 months is rare and we have recently traded lows not seen since 2007. As a CNBC commentator points out, low VIX levels may be because many are shunning their "insurance" premium payments when struggling with their performance and not because confidence is really high. The probability is that the S&P market will break its tight range at some point in the near future. Investors do seem too sure that the market is not very vulnerable and is underpinned by low interest rates.This complacency could be upset by reactions to the ISIS insurgency in Iraq and oil price shocks that hit America's trading partners, if not the US itself directly. Perhaps also a wobble will be induced by interest rate fears and sentiment turning. Anybody who has borrowed to invest would probably rush to the exit if they felt rates were going to rise earlier than foreseen. Essentially there are too many possible adverse scenarios to make a move above 14 in July unlikely.

Outcome: Yes
Score: 55
Mean score (all respondents): 16.25

Expert opinion:

Answer: No

Selected Expert Answer from Mettletest Panel:
A guest expert from Chicago, Mark Sebastian, Founder of Option Pit, has submitted an answer for the Mettletest Panel:
I like to look at the vix as the cost of insurance. Right now, historically the vix is somewhat low; however in relative terms the vix is somewhat high. Take this into consideration, over the last month the market has moved with a volatility of about 5.5%. Thus a 12 vix is quite overpriced in relative terms.
Additionally now that the S&P 500 is trading near 1950, a 1% move (a volatility of about 16%) is almost 20 points. A 15 point daily move would be about a 12 Vix.
Thus, the combination of small market movement and a high S&P are producing what is a relatively expensive vix, not a complacent vix.

Answer: Yes

Selected Expert Answer from Mettletest Panellist:
There is much comment from the market professionals that VIX levels around 12 are not low when compared to the recent (lack of) volatility in the market and that it should not be seen an indication that investors are ignoring the normal fluctuations on the S&P. Indeed we have seen a long 6 month + period in 2006 / 7 with VIX trading below 14. and who's to say it won't extend its current sub 14 run from late April to beyond July. However, risk perceptions can change swiftly and the VIX rise in consequence. It reached 80.06 on 27th Oct 2008! Investors appear to be focusing on interest rates and the continuation of a benign scenario for some time to come. Moreover, they feel that central bankers will step in to mitigate adverse shocks. This sentiment overrides concerns over geopolitics and even stability of company profits. Market exposure and leverage have risen As the time horizon to rising interest rates shortens, the market will become more jittery. You can see the potential with the small far-east market sell-off ahead of the Fed announcement today, though consensus is for little new. The likelihood is that, as quantitative easing is tapered, rate worries will increase and the market fall back to an extent that pushes the VIX up again, with a close above 14 before July is out.

Answer: No

Selected Expert Answer from John Karslake:
We are primarily considering attitudes to the US S&P 500 market, on which the VIX is based. VIX closed at 12.06 on 17th compared with an average of 19.9 since 2004. This seems low but is much higher than the actual volatility of the S&P recently. The VIX normally rises in reaction to (large) market falls. It is a measure of “insurance” premiums as implied volatility. For now, fears of market shocks are well balanced by anxiety at missing out on further market rises. Geopolitical upheavals in the Middle East would have been deleterious in the past, with the threat to oil prices, but the US feels better immunised now, with its domestic shale gas production. The market’s greatest concern has been the ending of easy money and return to rising interest rates. Downgrades in current year GDP forecasts from the IMF and Fed should postpone that day and keep investors sanguine, despite the implications of lower company profits. The probability therefore is that the market will remain stable through July with VIX below 14. The caveat is that unexpected (unexplained) falls can change things fast. VIX went from 11.15 to 18.31 on 27 Feb 07, when the S&P fell 3.5%, variously ascribed to Chinese markets, interest rate fears, Iran, Afghanistan.

Outcome: Yes

Comment on outcome from Mettletest Panellist:
After a period of calm the market volatility increased rapidly at the end of the month. The VIX closed at 16.95 on July 31st, having spiked above 14 on one previous day in July. Strength in the US economy spooked markets, raising the specter of rising interest rates a little sooner than had been anticipated. Some poor earnings figures combined with fresh worries about European banks and Argentinian debt provided ample reasons for a sell off. The S&P 500 fell 2% on the last day of July.