VOLATILITY INDEX: Largest weekly decline

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01/08/2013 | 11:07 am
As a reminder, the VIX is an indicator of volatility on options on the S&P 500. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge”.
It rose sharply at the end of year due to uncertainty about the resolution of the Fiscal Cliff. From 15 in mid-November, it finished the year at nearly 23, characterizing a significant return of risk aversion.
 The situation at the beginning of the year is totally opposite. The “fear index”, named by traders, has lost nearly 40% in the first week : the largest drop of the index since its creation. It reacted positively to the agreement between Republicans and Democrats in the U.S. budget on the Fiscal Cliff and amplifies the usual return of investors in risky assets at the beginning of the year.

How to interpret this decline?

It is primarily a psychological element that provides this index. Investors are confident and therefore more prone to risk-taking. The underlying so-called "safe heaven" are neglected (Gold, Yen, T-notes) in favor of more speculative assets.
Equity markets have benefited from this risk appetite (Dow Jones +3.84%, Eurostoxx50 +3.14%, Nasdaq +4.77%, CAC 40 +3.03%, DAX +2.15%), allowing to get off to a good start.
To confirm the bullish stock markets, you must be attentive to the behavior of the VIX. It returned to high levels of confidence (around 15), but it should stay in this area for a continuation of the recovery. Indeed, a quick upward acceleration and a comeback around the 20 level could lead to a disinvestment of equity markets to less risky assets.

Etienne Veber
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