by Michael Haltman
Knowledge Is Power – Francis Bacon
For those unfamiliar with the Credit Suisse Fear Barometer, it is another metric for gauging investor angst and expectation!
To the everyday stock market watcher the most commonly used metric for investor concern, aka fear, is the Chicago Board Options Exchange Volatility Index, better known as the VIX.
From the chart below it’s evident that, after a spike at the beginning of 2016, the VIX has now dropped to levels close to the longterm average indicating investor complacency about the state of all things economic and geopolitical.
For anyone who reads a newspaper or watches television, this news may come as somewhat of a surprise.
As a side-note I would have to opine here that one of the fundamental reasons for the optimistic ‘tone’ are the Federal Reserve-induced level of interest rates in the United States (ZIRP) along with rates around the world being held artificially low by the various central banks (ZIRP and NIRP).
Credit Suisse Fear Barometer
Another tool for investors who want to try and paint for themselves a macro picture of the markets is the Credit Suisse Fear Barometer.
While this barometer is not universally accepted and the description below may not be 100% clear to all who read it, the signal it is sending is diametrically opposed to the message being sent by the VIX.
This chart shows both the VIX (white) and CSFB (blue):
There are times when the two “fear” gauges move in the same direction and times when they are negatively correlated. A notable case of the negative correlation was in 2011 when the VIX was the highest it has been in the past five years and the CSFB hit a lower level than has been seen in the five years since.
If fear is two-faced maybe these are the two faces?
Bloomberg recently provided an extensive report on the CSFB:
‘The CSFB index, which measures the opportunity cost of buying protection against a decline in stocks, usually sees increases like this due to higher demand for “puts,” or options which give investors the right to sell equities, and lower demand for “calls,” which give the right to buy. Specifically, the barometer calculates how far “out of the money” an investor would have to go to purchase a three-month put on the S&P 500 that is the same price as a 10-percent out of the money three-month call option.
This time, however, the firm says the entire move was driven by lower demand for calls.
This means that people are putting a much higher probability on stocks falling rather than rising. “The derivatives market is assigning less than 1 percent probability the market will rise by 10 percent in the next three months vs. 17 percent probability it will fall by 10 percent,” wrote Credit Suisse’s Mandy Xu.
As a measure of market fear, however, Credit Suisse’s measure is not without its skeptics.
“When volatility gets very low, a lot of times, that 10 percent out of the money call gets to be worth almost nothing,” said Pravit Chintawongvanich, equity derivatives strategist at Macro Risk Advisors. “Meanwhile, the puts remain well bid so you have to go really, really far out of the money to find a put that costs the same.”
The high level of this so-called alternative fear index may therefore be more a function of a dearth of optimism in the form of inexpensive call options, than an abundance of fear.‘
For investors, and anyone else, these two market indicators help to present two-sides of the same coin concerning the state of all things economic.
Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at [email protected]
