VIX fear indicator shows professional traders not convinced by three-day stock rally
Posted on 28 September 2011 with no comments from readers
Elevated readings for the VIX fear indicator show that Wall Street traders are far from convinced by the three-day stockmarket rally on what may just be wishful thinking about a resolution of the eurozone crisis. There has been no solid news whatsoever to confirm these hopes, indeed Greece continues to slide towards a disorderly default on its sovereign debt.
Bloomberg reported: ‘The cost of options to protect against equity-market declines remains elevated even as shares reflect optimism that European leaders will tame the region’s debt crisis. Insurance against 10 percent losses in the S&P 500 has surged to the highest levels since May 2010, and the pricing difference between US and European options has narrowed.’
Blood pressure high
The VIX index itself remains high at 37.7, rather like finding your blood pressure at a level that requires immediate medication. As the BBC video of an allegedly independent trader showed yesterday these guys take a mercilessly pragmatic view (click here).
It is their business to look after trading positions to make money, not to help out the global economy and thankfully that element of a market economy is still functioning.
However, the fear factor is based on fundamentals that are not going away anytime soon. Professor Nouriel Roubini said yesterday he thought the US, eurozone and UK were already in recession, adding to Japan that has been there for months.
New global financial crisis
He noted that the big question now is whether the eurozone crisis turns into a major financial crisis, making things the recession much deeper, or is papered over in some way by a bailout.
Stories circulating over the weekend suggested the eurozone might adopt an idea proposed by US Treasury Secretary to eurozone leaders. However, the reality is that most of them ridicule the debt-ridden US for its suggestion, and it is not being taken seriously at all. For stock markets to rally so hard on baseless guesses about the future is not new, but it does only set them up for an even bigger fall.
Traders are the guys who position the money and have to judge the veracity of what they hear and they know when to trade a rumor and sell when the facts emerge. That is all we have been seeing in markets this week.
