On Wednesday October 3rd , I made an appearance on Bloomberg T.V. to talk about the CBOE Volatility index(VIX). I noted that the VIX November futures are trading above fair value, meaning sentiment is predicting an increase in volatility. Investors are uncertain whether the FOMC will change rates. Another pressing issue on the minds of investors is how the fall in housing prices will affect holiday retail sales. Less cash liquidity, combined with falling housing prices will typically result in higher volatility in the market.
The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...
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