VIX Resisting Panic as S&P 500 Rout Erases $320 Billion

By Callie Bost and Joseph Ciolli

Even as $320 billion was erased from U.S. equity values yesterday and all but 14 companies in the Standard & Poor’s 500 Index fell, volatility gauges signaled investors have yet to enter panic mode.
The 18 percent increase in the Chicago Board Options Exchange Volatility Index (VIX) sent the measure to 15.64 yesterday, below its peak level during every major drop since 2012, data compiled by Bloomberg show. The VIX, derived from the price of options used to hedge against losses, is hovering around its average level from the past three years, the data show.
Stocks slumped as Apple Inc. led a retreat in technology shares and concern grew over tensions erupting in Russia and the Middle East. The S&P 500 slipped 1.6 percent, a decline that matches the usual size of its biggest one- and two-day retreats since the
start of 2013, according to data compiled by Bloomberg.
“The market has gotten a little bit ahead of itself, and I’m not all that concerned,” Robert Pavlik, who helps oversee $4.5 billion as chief market strategist at New York-based Banyan Partners LLC, said in a phone interview. “Could it pull back a little more? Perhaps. But I still think we end the year stronger than where we started it by 8 to 10 percent.”

Past Selloffs

In the last two stock-market retreats of about 4 percent, in April and August, the VIX peaked at 17 before collapsing. In those instances, losses in the S&P 500 lasted less than two weeks. The gauge is down 2.3 percent since hitting a record on Sept. 18. The VIX reached 21.44 in February, the highest level this year, as the S&P 500 (SPX) approached a 6 percent drop.
The volatility index, also known as a fear gauge because it usually moves in the opposite direction of stock prices, is up 29 percent this week. It has averaged 16.7 since September 2011.
The S&P 500 retreat yesterday marked the 14th time this year the gauge has lost more than 1 percent over one or two days. In 2013, the S&P 500 experienced 19 dips of that size and the index finished the year up 30 percent.
The worst one- or two-day declines so far this year have averaged 1.8 percent, compared with 1.7 percent in 2013, according to data compiled by Bloomberg. The S&P 500 hasn’t had four consecutive declines this year as it continues a bull market that almost tripled its level since March 2009.

Short-Lived

“These periods of heightened volatility have been short-lived,” Max Breier, a senior equity derivatives trader at BMO Capital Markets Corp. in New York, said by phone. “It may the the case that investors are looking for some follow through on this selloff before volatility levels spike into the danger zone.”
The prospect of higher borrowing costs and less stimulus for the U.S. economy suggest stocks are poised for greater losses, according to Peter Cecchini, the New York-based chief strategist and global head of macro equity derivatives at Cantor Fitzgerald LP. The S&P 500 may fall as much as 7 percent this year and fall even further in 2015, he wrote in a research report yesterday.
Speculative corners of the market saw bigger declines. The Russell 2000 Index extended its September loss to 5.5 percent after losing 6.1 percent in July. The iShares iBoxx $ High Yield Corporate Bond ETF fell for a fourth day yesterday, sending its monthly decline to 2.8 percent.

Greater Volatility

“There’s certainly potential for greater volatility,” Bill Merz, a strategist on the derivatives and structured products team at U.S. Bank Wealth Management, said in a phone interview. The firm oversees $124 billion. “The fly in the ointment has been heightened macroeconomic and geopolitical risk that we’ve seen globally.”
Equities sank yesterday as data on U.S. equipment orders and weekly jobless claims bolstered the argument that the economy may be improving enough for the Federal Reserve to raise rates sooner than estimated. Losses in the stock market were extended after a report that Russian lawmakers are drafting legislation that would allow the government to seize foreign assets in the country.
Any retreat in the market will probably be modest and overall, most investors are looking to add money to stocks, according to Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp in Cleveland. About $7.3 billion has flowed into exchange-traded funds tracking U.S. equities in the past five days, data compiled by Bloomberg show.
“If people really start to get spooked by the selloff, prices will plunge and the VIX will rise at a pronounced degree,” McCain said by phone. The firm oversees more than $20 billion. “But so far, it looks like investors are taking it in stride.”