Volatility at 12Year Low Suggests US Stocks May Retreat
By Michael Tsang and Balduin Hesse
Nov. 21 (Bloomberg) -- The rally in U.S. stocks may be on its last legs based on an indicator that measures the rate of expected market swings.
The Chicago Board Options Exchange SPX Volatility Index yesterday closed below 10 for the first time since 1994, signaling that fund managers are too confident stocks will rise.
Low volatility ``suggests that investors are getting a bit too complacent,'' said Ian Sharman, who helps oversee $1.2 billion at Royal London Asset Management and owns U.S. stocks. ``The market is climbing a wall of worry.''
The VIX is based on prices paid for Standard & Poor's 500 Index options. In the past, lows in the VIX have heralded stock- market declines. There were sell-offs in May of this year, in 2001, in 1998 and in 1997 around the time that the volatility measure reached lows for the year.
The VIX fell 0.08 to 9.97 yesterday, closing below 10 for the first time since Jan. 28, 1994, when it reached 9.94.
From its 2006 low on June 13, the S&P 500 has rebounded 14 percent and closed at a six-year high last week. Share gains have been propelled by third-quarter earnings growth that was the fastest in seven quarters and by speculation that the Federal Reserve can cool inflation in the world's largest economy without tipping it into recession.
``Folks are in a pretty optimistic mood,'' said Alfred Goldman, chief market strategist at A.G. Edwards in St. Louis. ``When they see some negative economic data, they say, `Ho hum,' and when they see something positive, they say, `Oh boy!'''
`Soft Landing'
Third-quarter earnings for companies in the S&P 500 have climbed 18.9 percent on average, the most since the fourth quarter of 2004, according to figures compiled by Thomson Financial.
An index of leading U.S. economic indicators rose for a second month in October, pointing to a gradual strengthening of expansion early next year. The U.S. economy grew at a 1.6 percent pace last quarter, the slowest in more than three years.
``Notwithstanding the big run we've had since mid-July, the market continues to look very reasonably valued,'' said Fritz Meyer, a Denver-based senior investment officer at AIM Investments, which manages $149 billion. ``The soft landing is looking increasingly likely.'' As a result, ``investors generally are feeling complacent and not feeling nervous about a big decline'' in shares.
For Louise Yamada, managing director of Louise Yamada Technical Research Advisors LLC, the VIX's drop may suggest a short-term peak for stocks, followed by a longer-term rally sustained by investor enthusiasm.
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