The Chicago Board Options Exchange Volatility Index, otherwise known as the Vix index, is a very useful indicator of the short-term views of traders. What is interesting is the fact that last week the index fell to 9.77 which is the lowest level since 1993. This effectively means that traders are unconcerned about any imminent events impacting the stock market which would seem to be at odds with the worldwide news where there are many potential issues that could impact stock market. So, why are markets so calm in light of ongoing homeland and overseas issues?
Are traders being over optimistic?
Before we look at whether traders are being over optimistic with regards to the short-term direction of the US stock market, it is worth noting that the Vix index is based upon a 30 day outlook. Using algorithms the index is calculated on option market activity where investors are given the opportunity to buy calls, the option to buy, or puts, the option to sell. At this moment in time the index is suggesting that traders are extremely positive in the short-term and therefore we are unlikely to see any significant fall in US stock markets – at least for the next 30 days.
There is a growing concern that some traders are becoming overoptimistic. Indeed, the last time the Vix index fell below 10 was back in 2007, literally months before the US mortgage crisis which led to a worldwide economic collapse. That is not to say we are on the verge of another financial crisis but when traders seem to be trading in the same direction this can be a sign of an overconfident mood.
Reasons to be cautious
Over the last few weeks we have seen the likes of the Federal Reserve being very vocal about the state of the US economy and the fact that share prices may be stretched in the short-term. There are also concerns about the performance of President Donald Trump who has yet to deliver on his main policies and seems to be antagonising politicians at home and overseas. In the background we also have Brexit which will cause some uncertainty across Europe in the short to medium term with a potential knock-on effect to the worldwide economy.
These are issues which are ongoing although in the short term it is difficult to see any major changes which would prompt a stock market collapse. So, traders are extremely confident in the short-term according to the but this does not give us any indication about their medium-term thoughts – after the next 30 days.
Watch the markets
Each day seems to bring a new high to US stock markets with hopes that the economy is recovering and a recent resurgence in the oil price. Many investors are sitting on significant profits and any short-term market wobble may prompt them to at least bank part of their profits. On the upside, if Donald Trump is able to calm down the array of overseas issues ongoing at the moment then this would give him more time to focus on domestic issues. There is no doubt that investors believe he has the potential to increase economic growth in the US in the short to medium term with perhaps an element of magic dust to scatter over the real estate market – a market in which he has great experience.
As we stand today investors are perhaps more concerned about being out of the market as they are being in the market. Those who held off after the presidential campaign result was announced have quietly been dragged back into the market due to its surprise strength. How long can this last?