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 The CBOE Volatility Index <.VIX>, or VIX, closed on Friday at 11.36,
its lowest level since March 2013. That means investors see less
risk ahead, particularly with the S&P 500 <.SPX> ending at a record
high again on Friday.
With the typically slow summer months just ahead and little on the
horizon to shake the market from its current course, investors could
be looking at even lower VIX levels, some analysts said.
"It's not that there's no likelihood of a correction. It's that
people don't perceive anything to derail the train at this point,"
said Andrew Wilkinson, chief market analyst at Interactive Brokers
LLC in Greenwich, Connecticut. "So I think people are beginning to
wonder: Are we heading back to single-digit volatility?"
The S&P 500's record high and the drop in the VIX are not the only
signs that fear is not a factor on Wall Street.
Volume is down as well. S&P 500 E-mini futures volume was below the
1.52 million daily average of the past year on every day this week
except Tuesday.
The market's gain has come despite concerns about a slowdown in
China and weakness in small-cap names. Typically small-cap stocks
lead the market's advance when the U.S. economy is improving.
However, the recent selloff in small-cap stocks, which drove the
Russell 2000 index <.TOY> briefly into correction territory last
week, seems to have slowed. The Russell gained 2.1 percent this
week, its biggest weekly bounce in more than a month. The index is
less than 7 percent below its record close of 1,208.65 in early
March.
At the same time, the Dow Jones Transportation Average <.DJT> hit
record territory late Friday, nearly breaking above the 8,000 level.
"One of the reasons the VIX is so low, we haven't really done
anything this year. We haven't moved an awful lot," said J.J.
Kinahan, chief derivatives officer of TD Ameritrade in Chicago.
For the year, the S&P 500 has gained just 2.8 percent.
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To be sure, some analysts say the lack of volatility suggests a
complacency that could encourage excessive risk-taking. New York
Federal Reserve Bank President William Dudley and Dallas Fed
President Richard Fisher have both expressed such concerns in recent
days.
"The lower the VIX, the more overbought the market gets, leaving it
vulnerable to some kind of setback," said Donald Selkin, chief
market strategist at National Securities in New York.
But the lack of volatility is also showing up in the
foreign-exchange and commodities markets, according to Bespoke
Investment Group analysts. They noted lower implied volatility in
options in the foreign-exchange market as well as recent stability
in the PowerShares Deutsche Bank Agriculture Index exchange-traded
fund <DBA.P>.
"If the VIX index is pricing in too little volatility, then why is
it wrong to do so?" Bespoke analysts wrote.
(Wall St Week Ahead runs every Friday. Questions or comments on this
column can be emailed to:
caroline.valetkevitch(at)thomsonreuters.com )
(Reporting by Caroline Valetkevitch; Additional reporting by Ryan
Vlastelica; Editing by Jan Paschal)
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