Stock Market VIX Shows Biggest Drop Since Mid-August

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Richard Cox writes: The benchmark index that is used to price US stock options started to show declines on Friday for the first time in eight trading sessions, as positive economic data supported equity markets in the early part of the month.  The Chicago Board Options Exchange Volatility Index (VIX) dropped 8.6% to 13.8, which was the largest single-session decline since Oct. 16. The VIX essentially measures appropriate costs for the use of options as protection against losses in the S&P 500.  In the eight-session span prior to Friday, the VIX has risen 23%, after valuations in equity markets rose to their highest levels in four years.

“Downside activity in equity markets has come as a result of profit taking and improving economic data,” said Kris Alban of InvestingIQ, “which is being used to justify arguments that the Federal Reserve will be able to begin its tapering programs in the first quarter of next year.”  A scenario like this would weigh on earnings prospects and this is a marginal negative for market valuations.  But the upside moves in stocks toward the end of the week meant there was less need for traders to reduce hedges against potential losses in stock positions.  At this stage, the readings in the VIX indicate that investors are expecting no major market surprises for the remainder of the year.

Stock Activity

The S&P 500 rebounded on Friday, posting gains of 1.1% to close essentially where it started the week at 1,805.  Earlier in the week, the S&P 500 posted losses of 1.2%, so the turnaround on Friday was significant.  The Dow Jones Industrials were also broadly higher, gaining 1.3% after the Non Farm Payrolls release surprised to the topside.  Labor markets in the US added 203,000 jobs for the month of November, and the figures for the previous month were revised to 200,000.  Median forecasts from market analysts were calling for a rise of 185,000 jobs, so the latest figures are now showing that there is sustainable strength in the US jobs market.  This follows a series of reports that showed the manufacturing sector is also posting an encouraging performance, so the combination of all these events remains supportive for market bulls.

Fed Meeting

Looking ahead, the next major event will come on Dec. 17-18, which is when the US Federal Reserve will hold its next monetary policy meeting.  Investors will be looking for clues with regard to the Fed’s policy stance and the potential for reductions in stimulus.  As far as timetables, the market is currently looking for Fed tapering to start toward the end of Q1 2014, which would mean that the initial announcement would come at the policy meeting to be held on March 18-19.  Investors are currently expecting a stimulus reduction of $15 billion at that meeting.

Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics and price behavior in equity markets. He writes for MarketBulls.net, BinaryOptionShark.com,TheStreet, Seeking Alpha, and the Motley Fool.Investing strategies in these articles are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally suggestive of time horizons of one to six months.

© Copyright Richard Cox 2013

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