05.11.2012

Slow Down The Volatility

05.11.2012

Traders continue to feel out this week’s trading in equities, fixed income and other asset classes. After nearly a full six days of losses in the stock market, the major indices managed to close in positive territory. Perhaps the correction that everyone thought was on the way is merely that of a pullback.

Related to the theme of corrections and pullbacks is market volatility. The de facto gauge of volatility in equities, the CBOE Volatility Index, or Vix, has been on a steady decline since it dropped below the key 20 point level earlier in the week. The Vix is currently trading around 18.50.

The index dipping under 30 is considered to signal calmer markets as fear subsides from investors. Usually, equities and the Vix are inversely correlated with the index dropping rapidly in bull markets.

For the past two weeks, the Vix has hovered around 20 but has since dropped even lower to 18 points as of Thursday despite increasing concerns over the fate of Europe and problems related to sovereign debt holdings and bank debt.

While outlook on future Vix performance varies among traders, some believe that the index is set to head even lower. Some have even gone so far as to say that as long as there isn’t a major credit event or market event, dipping below 15 is a real possibility that could soon come to fruition.

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