Showing posts with label fiscal cliff. Show all posts
Showing posts with label fiscal cliff. Show all posts

Sunday, January 26, 2014

The Year in VIX and Volatility (2013)

This is the sixth year in a row I have offered a retrospective look at the year in VIX and Volatility, which is my attempt to cram the highlights of the year in volatility onto one graphic with a manageable amount of annotations.

In terms of equity volatility and specifically the VIX, 2013 was the story of a persistent bull market in stocks and very little in the way of implied or realized volatility, at least by historical standards. In fact, the VIX’s high water mark of 21.91 was the second lowest annual high point since 1995, eclipsed only by the Greenspan liquidity flood in 2005. Similarly, the average VIX in 2013 was just 14.23, considerably lower than the long-term average, which is a shade over 20. The year only saw two days in which the SPX was up 2% or more and another two days in which the SPX was down at least 2%, the fewest number of such days since 2006.

Even though the numbers may not be impressive, there were still some significant events during the course of the year that were able to provoke substantial anxiety and fear, at least for the short-term. The year began with the Fiscal Cliff drama coming to an end and saw fear in the euro zone heat up after the Italian elections ended with a parliamentary deadlock and Cypriot banks triggered a joint EU/IMF bailout of Cyprus. The Boston Marathon bombings provided a jolt of terrorist fear in April and fears about Japan the future of Abenomics created huge volatility in the yen, with ripple effects felt across currency markets and in many related financial markets during May and June.

In the U.S., the Fed tapering scenarios dominated the investment landscape during the second half of the year and the debt ceiling crisis, government shutdown and entrenched bipartisan bickering cast many doubts about the potential for some huge self-inflicted wounds.

In the end, the SPX set 44 new all-time closing highs in 2013 and the VIX ended the year almost 24% below where it finished in 2012, though the Fiscal Cliff was responsible for most of that gap.

[source(s): StockCharts.com. VIX and More]

So far 2014 looks more interesting from a volatility perspective, but the year is young and the volatility story is always one of surprises in the form of swans with dark gray plumage.

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Disclosure(s): none

Tuesday, October 8, 2013

A History of the VIX During Recent Debt Ceiling and Sequestration Battles

Democrats and Republicans have been fighting over budgets and related matters since before any of us were born and while the debate has been heated at times, only recently has the credit of U.S. debt been called into question as a result.

During the impasse that led to the government shutdowns of November 14 – 19, 1995 and December 16, 1995 – January 6, 1996, for instance, there was nary a whiff of panic in the air, as the VIX never made it above 15 and spent a good portion of the shutdown in the 10s.

The last three instances of party budget squabbling have been much different than the Clinton-era budgetary battles and one only has to watch the trajectory of the VIX during these battles to get a sense of the uncertainty, anxiety and risk that was priced into SPX options during the period. Granted, none of these budget and debt ceiling battles has unfolded in a vacuum and the August 2011 debt ceiling battle played out against the backdrop of a dramatic worsening of the situation in Greece and euro zone sovereign debt in general, but the relative moves in the VIX during these three crises can still be instructive.

The chart below captures the month leading up to as well as data following the following three budget battles, all of which had specific deadlines, which are identified in the chart by the vertical black line running through day zero:

  • the August 2011 debt ceiling crisis
  • the December 2012 sequestration crisis (fiscal cliff)
  • the current debt ceiling crisis

Note that the August 2011 debt ceiling crisis is a classic example of risks that turned out to be much greater than almost everyone had predicted, whereas the fears related to the December 2012 sequestration crisis quickly disappeared. Historically there have been many more false alarms than crises which have escalated out of control, which is part of the reason why investors tend to underestimate and/or discount the full potential of each threat and why the VIX has a tendency to spike and then mean revert fairly quickly.

With a little over a week before the October 17 debt ceiling deadline hits, the VIX is higher now than it was at a similar stage in July 2011 or December 2012. Certainly the political landscape has changed since the last two budget battles and both the Democrats and Republicans have had an opportunity to refine their strategies and tactics in the interim. How it all plays out this week and next is anyone’s guess. I still find it hard to believe that there will be a default, but that still leaves plenty of room for the type of “resolution” that drags out the current anxieties and leads to additional pitched battles – some of which may be even more costly – down the road.

So by all means root for a replay of December 2012, but prepare for August 2011 just in case…

[source(s): CBOE, VIX and More]

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Disclosure(s): none

Friday, January 18, 2013

The Inverted Percentile VIX

Of the many reasons that investors have a tendency to struggle with an interpretation of the VIX, one of the most obvious is an issue of orientation: for the most part, the VIX moves in the opposite direction of stocks. Frankly, it is difficult to appreciate some of the nuances of an upside-down world unless you spend a lot of time hanging upside down looking out at the world, like a bat.

It is partly for this reason that I created the “inverted VIX” back in August 2007. At that time, the VIX had just spiked into the mid-20s only two months after having traded in the 12s. The chart below is an updated version of the inverted VIX over the course of the past year and demonstrates that for the most part, the SPX and the inverted VIX track fairly closely, though there are times, such as just prior to the fiscal cliff denouement, when the VIX sometimes strikes out on its own path.

[source(s): StockCharts.com]

Today we are seeing a VIX of about 12.50 – the lowest the index has been since June 2007 – and once again investors are grappling for the proper context. Let me throw a new concept into the mix that may help: the inverted percentile VIX, a distant cousin of the inverted VIX. The way to think about the inverted percentile VIX is in terms of the lifetime of VIX values, in which a VIX of 12.50 is in the 12.2 percentile. The inverse of that is the 87.8 percentile, which corresponds with a VIX of 28.67. Now I am guessing that for most investors a VIX of 12.50 feels much lower than a VIX of 28.67 feels high. Statistically they are almost identical in terms of being outliers, so if a 28.67 VIX doesn’t sound like a scary high number, then a VIX of 12.50 should not sound like a scary low number that is reflecting too much complacency.

Investors may wish to consider recalibrating their emotions and expectations or, failing that, take advantage of the relatively low VIX by buying some VIX calls so as to profit when the rest of the world comes to the realization that a VIX in the 12s is making them too nervous. Keep in mind, however, that current 10-day historical volatility of the SPX is in the 5s, so that number would have to double just to be able to support the current level of the VIX going forward.

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Disclosure(s): none

Monday, January 7, 2013

Investor Fears Pivot to U.S. Deficit and Debt Ceiling Following Cliff Deal

Just one week after Democrats and Republicans cobbled together a last-minute fiscal cliff deal, investors turned their focus to the next battleground in the fiscal crisis, tabbing the U.S. deficit and debt ceiling as their #1 concern in the VIX and More weekly fear poll. Fears associated with governments and politicians polled a distant second, while ongoing worries related to weak corporate earnings finished in third place, one day before Alcoa (AA) unofficially kicks of the Q4 earnings reporting season.

The two issues that dominated the fear poll during the last quarter seem to have receded from the consciousness of most investors. While the legacy of the fiscal cliff lives on in the debt ceiling discussions, the immediate threat has passed. Meanwhile, in spite of warnings from the likes of Angela Merkel, concerns related to the European sovereign debt crisis remain at low levels and continue to decline.

On the institutional front, one of the residual effects of the fiscal cliff is a persistent worry that the fiscal cliff is merely a symptom of a dysfunctional bi-partisan government with a newfound affection for brinksmanship. On the other hand, worries about excessive central bank intervention are falling, no doubt helped in that regard by the recent FOMC minutes from the December 11-12th meeting.

With the VIX posting a record one-week decline last week, it is reasonable to conclude that investor worries about the fiscal cliff were of a much higher magnitude than those related to the U.S. debt ceiling and deficit. In fact, there are some divergent opinions about the relationship between the declining VIX and the fiscal cliff deal. For more on this subject, check out the comments from Jared Woodard of Condor Options in The Market Is As Nervous as Ever About Austerity Fetishisms, in which Jared picks up on a theme from a recent note by Alec Phillips of Goldman Sachs (GS).

Once again, thanks to all who participated in this weekly poll.

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Disclosure(s): none

Friday, January 4, 2013

VIX ETP Performance in 2012

For anyone who pays attention to the VIX exchange-traded products space, 2012 was the year of the inverse (short) VIX futures ETP. The graphic below recaps the performance of the VIX ETPs that were trading as of the end of 2012 and it is easy to see that if you were long the inverse products (XIV, SVXY, ZIV, etc.) and were able to hold on to these positions during volatility storms such as the Greek elections, yield spikes on the sovereign debt of Italy and Spain, the fiscal cliff, etc. (all of which required nerves of steel and a creative risk management approach), then 2012 was a very good year for you. If not, then let the performance ups and downs be a reminder that most of the VIX ETPs are not well-suited for mainstream investors.

Instead of going into too much detail about the performance and reiterating much of what I have already said in the past, I encourage readers to investigate the links below, which include some predictions about future price moves and risk-reward ratios that have been borne out by the events of 2012.

If your new to this product space, perhaps the first place you should begin your research is with posts tagged with labels such as contango, roll yield and term structure – subjects that I have been writing about since the first VIX ETPs were launched, three years ago this month.

[Note that there are no performance numbers for VIXH or PHDG, as these products were launched during the year and have not yet accumulated full-year performance data.]

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Disclosure(s): long XIV, SVXY and ZIV at time of writing

Wednesday, January 2, 2013

The Year in VIX and Volatility (2012)

Every year I assemble a chart that is my retrospective look at the year in volatility. While 2012 was the first year since 2006 that the VIX failed to make it out of the 20s, this was not due to an absence of threats to the stock market.

During the first half of the year, the euro zone was the primary concern for most investors, with the events surrounding the two nail-biting elections in Greece haunting the markets from April through June. With Greece off of the front page, focus of the European sovereign debt crisis shifted to unsustainable government debt yields in Spain and Italy, which only began to turn around after Mario Draghi pledged to do “whatever it takes” to save the euro in July.

Meanwhile, markets in the United States were relatively calm due to the repeated intervention of the Fed, which offered up QE 2.5, QE3 and QE4. The global economy also found support in the form of central bank stimulus plans from China, Japan and the euro zone.

The last hurrah for the VIX and volatility in 2012 was the fiscal cliff, which was largely overlooked during the U.S. elections, but dominated the headlines even before the last vote was counted. The fiscal cliff issue remained the #1 source of concern for investors throughout the balance of the year and had the VIX moving counter to its usual direction for most of December.

As 2013 dawns, fears related to the fiscal cliff are plummeting and dragging the VIX down with it, but clearly the issues that have kept the financial markets on edge for the past few years are not yet behind us and unseen risks are always lurking just over the horizon.

[source(s): StockCharts.com]

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Disclosure(s): none

Monday, December 31, 2012

Just a Change of Venue? (Fears About U.S. Deficit/Debt Ceiling Replacing Fiscal Cliff Worries)

With the U.S. fiscal cliff negotiations going down to the wire, it is not surprising that fears related to the fiscal cliff topped the list of investor threats to the stock market for the eleventh week in a row in the VIX and More weekly fear poll. Fears associated with governments and politicians as well as excessive central bank intervention polled in second and third place, respectively.

What I found particularly interesting is the sudden rise in fears related to the U.S. deficit and debt ceiling, as investors appear to be concluding that the current fiscal cliff negotiations are now just one more skirmish in the ongoing war between Democrats and Republicans regarding how to address the U.S. budget deficit. With Treasury Secretary Timothy Geithner saying that the U.S. will hit its debt ceiling today and have to resort to extraordinary measures to keep under the legal limit, the stage is set for the next pitched battle when these extraordinary measures can no longer do their trick, in about two months.

So what problems will a fiscal cliff deal resolve? Part of the answer to this question depends upon whether the pending (we hope) deal is merely a stopgap measure or addresses some of the more politically thorny underlying issues related to the budget deficit in a comprehensive way. Of course the trick is structuring the deal in such a way that it does so in a manner which limits any negative impact on the economy.

Stay tuned. A fiscal cliff deal may only signal a change of venue and redirect investor fears to the next battleground.

Once again, thanks to all who participated in this weekly poll.

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Disclosure(s): none

Monday, December 24, 2012

Fiscal Cliff Widens Lead as #1 Investor Concern

Extending a recent trend, the U.S. fiscal cliff topped the list of investor threats to the stock market for the tenth consecutive week in the VIX and More weekly fear poll. Fears associated with excessive central bank intervention were a distant second, while more general concerns about government and politicians finished third in the poll.

The gap between the fiscal cliff and the runner-up issue was 10.6% this week, the largest in six weeks and the second largest since the inception of the poll some ten weeks ago.

For the second week in a row, geographical differences among the respondents were relatively small, with only minor differences between U.S. and non-U.S. respondents. The regional myopia that had separated U.S. and non-U.S. respondents on the relative importance of the fiscal cliff vs. the European sovereign debt crisis for most of the last three months appears to have subsided over the last two weeks, in conjunction with the widespread lessening of fears over the future of the euro zone.

Once again, thanks to all who participated in this weekly poll.

Last but not least, Merry Christmas, happy holidays and best wishes for a joyful, healthy, happy and profitable 2013!

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Disclosure(s): none

Monday, December 17, 2012

Fiscal Cliff Continues to Top Fear Poll

In a week in which there appears to have been little progress in the U.S. fiscal cliff negotiations, investors continue to cite the fiscal cliff as the largest threat to the stock market in the VIX and More weekly fear poll. Fears related to government and politicians beat out concerns about excessive central bank intervention as the #2 issue, while anxiety related to the European sovereign debt crisis finished in a tie for fourth.

The poll marked only the third time in nine weeks that U.S. and non-U.S. respondents agreed on the top threat and was the first time that U.S. and non-U.S. respondents placed the top two threats in the same order. In fact, agreement on the order of the threats was the same through the top three.

In another sign that geographical proximity bias has receded, U.S. respondents gave more weight to the European sovereign debt crisis than non-U.S. respondents (the majority of whom are European), while non-U.S. respondents gave more weight to the fiscal cliff than U.S. respondents. In previous weeks, there had been strong evidence of regional myopia.

Another item of note, with last week’s dramatic change in Fed policy away from a timetable to targeted unemployment and inflation rates, one might expect the balance of fear to tilt more in the direction of inflation or deflation this week. Instead, there was a notable jump in concerns over both inflation and deflation, particularly from U.S. respondents.

It is reasonable to ask what might happen if there is a deal in the fiscal cliff in the next week or two. Will a deal also have a significant impact on concerns related to government and politicians or will concerns related to institutions persist and prove to be something more than an event-specific concern? Finally, if the fiscal cliff fears disappear with a deal, which new fears will bubble up to take its place? This week several respondents submitted write-in votes related to high-frequency trading (HFT) and algorithmic trading. Will this be the next fear to stalk the stock market?

Once again, thanks to all who participated in this weekly poll.

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Disclosure(s): none

Monday, December 10, 2012

Fear Poll Respondents Focus on Fiscal Cliff, Dismissive of European Financial Crisis

For the eighth week in a row, concerns about the U.S. fiscal cliff topped the VIX and More weekly fear poll. Fears related to excessive central bank intervention nudged out concerns related to government and politicians as the #2 issue, but perhaps the most interesting development is the how much the anxiety related to the European sovereign debt crisis continues to subside.

From a geographical perspective, U.S. and non-U.S. respondents had a relatively low divergence of opinion this week. That being said, whereas U.S. respondents cited the fiscal cliff as the top concern, non-U.S. respondents were most concerned about excessive central bank intervention in the economy. Perhaps part of the fallout from the fiscal cliff negotiations is that U.S. respondents see governments and politicians as much more likely to be the top threat to the stock market, by a margin of 5.6% over non-U.S. respondents.

Interestingly, both U.S. and non-U.S. respondents expressed much less concern about the euro zone problems, with only 4.9% of U.S. respondents citing euro zones as the #1 concern, while 5.9% of non-U.S. respondents put the euro zone issues at the top of the list.

With the FOMC meeting scheduled to wind up on Wednesday, the fiscal cliff talks inching closer to that last day on which legislation can be introduced in Congress for the year (December 18th, based upon a December 21st recess) and Alcoa scheduled to report Q4 earnings and unofficially kick of the next earnings reporting season on January 8th, there is the potential for quite a few things to hit the fan in the coming month.

In spite of all these threats looming just around the corner, the VIX remains subdued and is still in a position to reinforce the notion that December Is the Cruelest Month…for the VIX.

Once again, thanks to all who participated in this weekly poll.

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Disclosure(s): none

Friday, December 7, 2012

Unusual Twist in VIX Futures Term Structure as of Late

Even with the U.S. fiscal cliff grabbing all the headlines and keeping the VIX from dipping under 15, I still thought I might be able to trot out my annual series of posts on the holiday effect (or calendar reversion):

As it turns out, fears related to the fiscal cliff have trumped the seasonal factors – at least so far – and the VIX futures term structure has twisted and turned in a decidedly unusual manner.

The graphic below shows the VIX futures term structure curve from November 27th (dotted red line) and again today (solid blue line), eight trading days later. Typically when there are changes in the term structure, the most extreme moves are in the front month (Dec) contract, the second largest move is in the second month (Jan) contract and so on down to the back month, which typically moves only about one third as much as the front month.

What makes the graphic below so interesting is that the front month contract is up slightly (actually up 0.05 points) while the market’s estimation of future implied volatility going out all the way to August has dropped at least 2.2% (Jul and Aug) and as much as 3.8% (Feb). What can we conclude about these changes in the VIX futures? Well, most likely investors are buying protection against a move in December (the VIX futures expire at the open on December 19th) and are selling longer-dated VIX futures contracts for February and other months in order to finance the cost of that protection. All things being said, the market is reflecting less risk in 2013, somewhat offset by a slight increase in risk and uncertainty for the next two weeks or so.

[source(s): CBOE Futures Exchange (CFE)]

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Disclosure(s): none

Monday, December 3, 2012

Fear of Governments and Politicians Climb Rapidly as Euro Zone Worries Wane

While concerns about the U.S. fiscal cliff topped the VIX and More weekly fear poll for the seventh week in a row, the big story is that investors are increasingly more concerned about the governments and politicians who are tasked with finding the solutions to these crises than the crises themselves.

Even though it is a global concern, fears and anxieties related to governments and politicians is most evident in the United States, where governments and politicians outpolled the fiscal cliff by a margin of 27.9% to 26.7%. Frustrations over the actions (or lack thereof) of governments and politicians were only the #4 concern outside of the U.S., where the fiscal cliff polled in the #1 slot, followed by the European sovereign debt crisis and continued weak earnings.

Respondents across the globe now see enough progress in the euro zone that the financial crisis in Europe has been relegated to a second tier of worries.

Another development worth noting is the sudden disappearance of an Americentric bias in the fiscal cliff issue. Over the past six weeks U.S. based respondents have been 13.1% more likely than non-U.S. respondents to cite the fiscal cliff as their top concern. This week was the first week that non-U.S. respondents saw the fiscal cliff as a bigger fear than their U.S. counterparts. Of course if one were to attribute most of the anxiety over governments and politicians in the U.S. to the fiscal cliff, then the results of this poll might say more about how different populations see the root cause of the fiscal cliff issue than anything else.

As noted last week, if one adds up the fiscal cliff, euro zone, central bank and government + politicians responses, it is possible to pin some 75-80% of all investor fears on institutions such as central banks and governments, with the fiscal cliff and the euro zone financial crisis merely symptoms of a larger underlying problem.

Once again, thanks to all who participated in this weekly poll.

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Disclosure(s): none

Monday, November 26, 2012

Fiscal Cliff Concerns Top Fear Poll, But Central Banks and Politicians Seen as Key Systemic Threats

Concerns about the U.S. fiscal cliff continued to top the VIX and More weekly fear poll, while investor anxiety regarding weak earnings, Israel and China all declined substantially.

The biggest change in investor fears over the course of the past two weeks is a growing trend toward the mistrust of the role of institutions such as central banks and governments in economic matters. Concerns about central bankers and politicians are significant enough to poll in the #3 and #4 spots for all respondents, but rate even higher in the U.S., where government and politicians were the #2 concern and excessive central bank intervention worries garnered the #3 spot.

If one considers the fiscal cliff and the European sovereign debt crisis (still polling in the #2 slot on a global basis) to be situations that have been caused by and/or exacerbated by central banks, governments and politicians, then it is not too difficult to pin some 75-80% of all investor fears on central banks and governments.

As noted in previous weeks, the persistent Americentric bias shows no signs of abating. This week, for example, 12.4% more of the U.S. respondents cited the fiscal cliff as the top concern over the European sovereign debt crisis. For non-U.S. respondents, however, the fiscal cliff outpolled the European sovereign debt crisis by only 2.8%.

Once again, thanks to all who participated in this weekly poll.

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Disclosure(s): none

Monday, November 19, 2012

Fiscal Cliff and European Sovereign Debt Concerns Recede, Earnings Worries Linger

Concerns about the U.S. fiscal cliff and the European sovereign debt crisis both declined over the course of the past week, as stocks made a concerted effort to establish a bottom, following an 8.9% decline in the S&P 500 index, according to the VIX and More weekly fear poll.

Even though the earnings reporting season is almost over, investors continued to express concern about weak earnings and guidance going forward, with earnings worries finishing a close third in the poll.

The biggest changes in investor sentiment have come in the form of growing discontent with institutions such as central banks and governments and concerns that their intervention in economic matters will have more of a negative than positive effect. Fears about excessive intervention on the part of central banks as well as more broadly with the role of governments and politicians were largely absent just two weeks ago. Taken together, this lack of trust with respect to the two influential policy-making institutions is now as big as concern as that of the fiscal cliff or the euro zone woes, as shown in the graphic below.

The persistent Americentric bias is still apparent. This week, for example, 8.5% more of the U.S. respondents cited the fiscal cliff as the top concern over the European sovereign debt crisis. For non-U.S. respondents, however, the European sovereign debt crisis outpolled the fiscal cliff by a margin of 3.2%.

Also of note from a geographical perspective, U.S. respondents were 1.8% more likely than non-U.S. respondents to tab excessive central bank intervention as their top fear and 5.9% more likely to point to government and politicians as their biggest concern. In addition to placing higher emphasis on the European sovereign debt crisis, non-U.S. respondents also expressed much more concern about China and deflation.

Once again, thanks to all who participated in this weekly poll.

Related posts:

Disclosure(s): none

Monday, November 12, 2012

Fear Poll: Fiscal Cliff Fears Spike, Concerns About Excessive Central Bank Intervention Rise

For the fourth week in a row, the U.S. fiscal cliff topped the list of investor fears about the stock market. With all the media attention heaped on the fiscal cliff since the election, it should come as no surprise that the fiscal cliff outpolled the second-place European sovereign debt crisis by 10.9%, the widest margin since the Fear Poll began four weeks ago.

Concerns about continued weak corporate earnings held on to the #3 spot, even as the earnings season winds down, while anxiety about problems related to excessive central bank interventions moved into the #4 slot. Among write-in votes, the biggest issue is frustration with government and politicians, which is certainly related to some of fears about how the fiscal cliff and euro zone problems will be resolved.

The Americentric perspective was once again in evidence this week, with U.S. respondents seeing the fiscal cliff as more concerning than the European sovereign debt crisis by a margin of 16.2%, while non-U.S. respondents saw the two issues as almost equally important, with the fiscal cliff winning out by only 1.8%. Interestingly, this parochialism seems to be a largely American phenomenon, as Israeli respondents have been less concerned about Iran than non-Israeli respondents and German respondents have been less concerned about the European sovereign debt crisis than the rest of the world.

With the U.S. elections now in the rear view mirror, U.S. respondents were no doubt at least partly influenced by the media pivoting away from the elections and toward the fiscal cliff issues – a development I analyzed yesterday in The Rise of Fiscal Cliff Concerns.

Thanks to all who have participated in these polls and have helped to generate a very interesting data set. Clearly we have a lot to learn about what drives fear and how those fears can be amplified by geography, media and proximity in time.

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Disclosure(s): none

Sunday, November 11, 2012

The Rise of Fiscal Cliff Concerns

How much of the recent selloff in stocks has been triggered by media’s sudden obsession with the U.S. fiscal cliff? Is it possible that very little has changed under the surface, but the decibels associated with this issue are now off the charts?

For the last three weeks, VIX and More Fear Poll respondents have rated the issues surrounding the U.S. fiscal cliff as their biggest source of fear about the future of the stock market. Now that the election is behind us and the earnings season is winding down, these fears have been buttressed by a huge amount of media scrutiny suddenly being devoted to the subject.

The fiscal cliff is one of those issues that has been on the horizon for many months, but only recently have investors begun to pay attention to the problem. Part of the reason for this sudden interest in the fiscal cliff is that Congress and the Obama Administration were not going to address the fiscal cliff during the campaign season and consequently no one expected any progress on the fiscal cliff issues during this period. Now that the election is over, the issue is seen as a ticking time bomb, with a much shorter fuse each day.

While politicians, economists and business leaders across the globe have called for a speedy resolution of the fiscal cliff negotiations between Democrats and Republicans, the highly respected Congressional Budget Office added some new urgency to the dialogue with the publication of two new documents on Thursday:

  1. Economic Effect of Policies Contributing to Fiscal Tightening in 2013
  2. Choices for Deficit Reduction

I cannot say that I pay much attention to the likes of CNBC and Bloomberg TV, but I understand that the fiscal cliff issue is now dominating the business television airwaves as well.

All this makes me wonder just how much of the recent selloff in stocks is driven by substance and how much is driven by the media frenzy.

I took a look at the Google Trends data for “fiscal cliff” and discovered that the issue barely registered on Google’s radar until about May of this year.

[source(s): Google Trends]

There was an occasional mention of the fiscal cliff up through last Sunday, then on Monday, the day before the U.S. election, new interest in the subject began to surface. The big spike in interest in the fiscal cliff happened on the day following the election, when Google search volume in “fiscal cliff” rose tenfold and the media frenzy began.

[source(s): Google Trends]

Over the weekend, concerns about the fiscal cliff have been outpolling (voting is still open) concerns about the ongoing European sovereign debt crisis by the largest margin yet. The real question is whether this is due largely to a redirection of attention by the media and by investors or by changes in the underlying nature of the issue or the likelihood of a timely resolution to the problem. My guess is that more of the former is at work than the latter.

Related posts:

Disclosure(s): none

Monday, November 5, 2012

Fiscal Cliff Worries Grow As Election Nears

Anxiety over the outcome of the U.S. fiscal cliff topped the list of investor fears about the stock market for the third week in a row, outpolling the European sovereign debt crisis, which finished a distant second, and U.S. elections, which edged out weak earnings for third place.

With 65% of responses coming from U.S. voters, the poll results were once again skewed toward an Americentric perspective. Three weeks into this poll, it appears as if geographical and temporal proximity are having a strong effect on respondents. For third week in a row, U.S., respondents were much more concerned about events in their own country. For example, the fiscal cliff outpolled the European sovereign debt crisis by 14.8% in the U.S., while non-U.S. respondents had these two issues deadlocked in a tie for first place. Similarly, 13.9% of U.S. respondents cited U.S. elections as their top worry, while just 5.3% of non-U.S. respondents placed U.S. elections at the top of the list.

Not surprisingly, concerns about a weak earnings season fell sharply over the course of the past week, from 18.6% to 9.7%, as most of the critical earnings reports are already in the books and the potential for meaningful surprises has diminished substantially, as shown in the graphic below.

With most of the election uncertainty about to be resolved tomorrow, I anticipate that the fiscal cliff and the European sovereign debt crisis will once again separate from the pack in the next week. Whether this will place upward or downward pressure on the VIX remains to be seen.

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Disclosure(s): none

How High Might the VIX Spike?

Given all the drama in the euro zone, not to mention the fiscal cliff, the various difficulties in China, continued unrest in the Middle East and Northern Africa, etc. it is more than a little surprising that the CBOE Volatility Index (VIX) has failed to trade above 30.00 this year.

In fact, with a maximum VIX of just 27.73 for the year, 2012 could mark the first time in 15 years (if one excludes the great Greenspan liquidity bubble from 2004 – 2006) that the VIX has not made it out of the twenties.

How does 27.73 compare as an annual high in the VIX? Since 1990, the mean high in the VIX has been 37.90 (inflated somewhat by the 2008 high of 89.53), while the median high VIX has still been a reasonably lofty 35.93.

This is not to suggest that the markets have been mispricing SPX options (and therefore the VIX) for most of 2012, only to note that there are certainly quite a few chapters remaining in the European sovereign debt crisis and the fiscal cliff drama, several of which will unfold before the year is over.

This could be one of those years in which the VIX never makes it into the thirties, but if that is to be the case, it will have to buck some fairly high odds in the process.

Related posts:

[source(s): CBOE, Yahoo]

Disclosure(s): none

Monday, October 29, 2012

U.S. Fiscal Cliff Fears Top VIX and More Fear Poll Again

For the second week in a row, investors cited the U.S. fiscal cliff as the top risk to the stock market, followed closely by fears about the European sovereign debt crisis. Concerns about weak earnings, a distant third last week, gained significant ground as Apple (AAPL) and others continued to report disappointing earnings and revenues while guiding future expectations lower.

As was the case last week, geography appears to have a significant influence on results, with a clear Americentric bias coming from U.S.-based respondents. In the U.S., for instance, concerns about the fiscal cliff outpolled the European sovereign debt crisis by 9.5%, but outside of the U.S. the European sovereign debt crisis topped concerns about the fiscal cliff by 8.2%. Similarly, 15.2% of U.S. respondents cited U.S. election uncertainty as the biggest risk to stocks while just 5.5% of non-U.S. respondents judged U.S. elections to be the top risk factor.

This week I added inflation and deflation to the list of pre-populated answers. Both responses fell far down the list of concerns, but almost twice as many respondents expressed concern about inflation relative to deflation.  While the graphic below shows the week-to-week changes in the top four issues driving stock market fears, it will probably be several more weeks before this graphic offers meaningful insights.

Once again, there were quite a few write-in votes, but there was no discernible theme among write-in responses.

With U.S. stock markets closed today due to hurricane Sandy, the VIX currently stands at 17.81, some 7.2% higher than it was a week ago when I published the results of the inaugural VIX and More Fear Poll.

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Disclosure(s): long VIX and short AAPL at time of writing

Monday, October 22, 2012

U.S. Fiscal Cliff Concerns Top Results in Inaugural VIX and More Fear Poll

Today I closed the books on the first VIX and More Fear Poll, which I consider to be an unqualified success and a first step in establishing longitudinal data about the types of geopolitical, macroeconomic, technical and other issues that make investors fearful, anxious and uncertain about the future of the stock market.

In a battle that went down to the wire, 28.7% investors voted the U.S. fiscal cliff as their #1 concern right now, followed closely by fears about the European sovereign debt crisis, which 27.1% labeled as their top issue. The prospect of a weak earnings season was a distant third at 13.1%.

[source(s): VIX and More]

There were some interesting findings when the 244 responses were broken out geographically. In the U.S., for instance, the fiscal cliff issue dominated the European sovereign debt crisis, 31.5% to 22.2%, with weak earnings third at 15.4%. Looking at non-U.S. responses, the Americentric bias disappears, as 36.6% of respondents tab the European sovereign debt crisis as their top worry, followed by the fiscal cliff (23.2%) and U.S. elections (9.8%).

While there were quite a few write-in votes, no theme emerged from these responses, though central bank interventions, U.S. debt, deleveraging, higher interest rates, high-frequency trading, demographics and technical factors were among the issues cited.

Among some of the questions raised by the results are the role of local and national media in shaping investors’ fears and the tendency of investors to overemphasize events that are closest to home. These are just two of the issues that I hope to explore going forward, making use of some of the data generated by this poll over time and comparing the ebb and flow of concerns against the ebb and flow of the VIX.

Going forward, I anticipate a weekly VIX and More Fear Poll each weekend, with the results and some takeaways to be published at about the same time every week.

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Disclosure(s): none

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