VIX Volatility Foreshadows a September Sell Off

Brian Hicks

Updated August 11, 2009




With the summer rally beginning to fade, all eyes are now on the vix index. That’s because as months go, September and October tend to be rocky ones for the stock market.

In fact, historically, September has been the worst month of all time for stocks, while October is remembered as the month of epic crashes.

That’s why traders are now keeping a close eye on the fear gauge, looking for signs of the market’s next move.

Unfortunately, however, that may mean a September sell off as the vix volatilty continues to tick higher of late.

From Bloomberg by Jeff Kearns and Michael Tsang entitled: VIX Signals S&P 500 Swoon as September Approaches

“Options traders are increasing bets that the steepest rally in the Standard & Poor’s 500 Index since the 1930s won’t survive September, historically the worst month for U.S. equities.

Traders were betting the VIX, a gauge of expected stock swings, would increase 13 percent in the next five weeks, according to futures prices at the end of last week compiled by Bloomberg. That’s the biggest spread since August 2008, before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show.

VIX futures above the level of the index show investors expect fluctuations to widen and stocks to retreat. The S&P 500 has rallied 49 percent in five months, pushing valuations to the highest levels since December 2004. The S&P 500 gained 2.3 percent last week as reports showed home sales rose and the unemployment rate fell.

“It’s a danger sign,” said Ronald Egalka, a 36-year options trader who oversees $8 billion as chief executive officer of Rampart Investment Management in Boston. “People expect volatility to pick up in the future, and that implies that there’s going to be a downward movement in the market.”

History shows that U.S. investors lose the most in September. The benchmark index for American equities fell 1.3 percent on average since 1928 that month, data compiled by Bloomberg show.”



Related Articles:

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The Ultimate “Fear Gauge” For Beating the Crowds to Big Profits

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The ‘irrational exuberance’ of the stock market

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