10.21.2011

The Next Step

10.21.2011

Market participants’ fears have calmed for now as the Dow Jones Industrial Average nears the 12,000 level and the S&P 500 climbs above 1230, but until Europe has a definitive plan for handling its debt crisis, investors remain cautious.

Key evidence of traders remaining cautious lies in the Chicago Board Options Exchange’s Volatility Index (VIX). Despite a large rally on Friday, which has essentially become the norm these days, the VIX only declined about six percent and remains above 30 – a key level for gauging fear in the markets.

Some traders are of the opinion that if European nations can agree upon a hard, set in stone plan for aiding nations like Greece and Italy, U.S. equities will continue to rally and the VIX will fall even lower. Those in charge of Europe’s policies are currently mulling a $1.3 trillion rescue package that would aid central banks in purchasing troubled, depreciated assets.

The European Financial Stability Fund (EFSF) has 440 billion euros of bailout power, having already lent out 160 euros out to Greece and other nations. It was slated to be replaced by a permanent bailout fund, the European Stability Mechanism, in 2013 but it now appears that the ESM will begin in 2012.

It all comes down to Germany and France agreeing on terms of the various bailouts and determining the proper function for delivering monies from the EFSF. If an agreement is reached, traders expect volatility to drop and the current bull market to continue.

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