Summer’s here, and no problems?

András Cserháti
Senior Product Manager

Not every market has the same outlook mid-year

Half of 2009 has passed, and for now it seems that the capital markets have temporarily caught their breath after the horrors of January and February. The current rally, which is now in its fourth month, has pushed the Chicago Board Options Exchange volatility index, the VIX, back down to below 25.66 points, which is where it stood before the Lehman Brothers meltdown, the greatest bankruptcy of all time. The index, which in the past few days closed at as low as 25.33 points, has fallen 69% from its October peak, and 37% since the beginning of the year. Nevertheless, the current level is still high, at well over the 20 points that can be regarded as average. Investors are not entirely certain that there will be no more bad developments; they merely suspect that we are over the worst, but the majority remain uncertain about the likely speed of the recovery. And this uncertainty is understandable in the light of the events that have followed similar VIX levels in the past. In 1998 the “fear barometer” plunged to 25.95 points, then over the next two-and-a-half months, as a result of the Russian crisis and the collapse of U.S. hedge fund Long-Term Capital Management, the S&P 500 index fell 11%. At the end of March 2000 the volatility index stood at 25.47 points, following which the bursting of the dot.com bubble (exacerbated by the 2001 terror attacks) sent the bear market into freefall, plummeting 49% by autumn 2002. From then on, a rise of around 20% up to the end of the year was followed by another 15% fall, lasting until spring 2003, and only then was the way clear for a bull market that lasted four years. Another, similarly important gauge of sentiment, the equity put/call ratio, also shows that it is better to err on the side of caution, as after tentatively foraying into “bull” territory, it has today slipped back to the middle of the neutral zone.

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