Saturday, June 20, 2015

EURO STOXX 50 VIX At Record Wide Spread Versus S&P 500 VIX

The VIX index is a measure of volatility and a higher VIX reading is associated heightened investor fear. Because this index is know as the fear index, a higher VIX reading is viewed as a contrarian indicator. In late 2008 the VIX hit a level of near 90% as compared to today's reading of about 14%. Shortly after this high reading the S&P 500 Index reached a bottom and has been on a march higher since.

VIX measures are available for other markets outside the U.S. and one getting some attention at the moment is the EURO STOXX 50 VIX. As the below chart shows the VIX for the EURO STOXX Index has widened to a historically wide level versus the S&P VIX. This widening is likely the result of concern around the consequences of the resolution of the issues in Greece issues and the potential impact on European markets.

From The Blog of HORAN Capital Advisors

As can be seen in the above chart, the average spread between the VIX and EURO STOXX VIX is 3.78% and the current spread is 14.95%. The current reading places this spread difference in the 99 percentile over the last ten years.

For investors then, the question becomes how this spread differential gets resolved. Is the ultimate resolution in Greece a "kick the can" one which is likely viewed favorably by the market or is the future path one where Greece is removed from the Euro Zone? Can Hui, CFA wrote an insightful article covering potential outcomes for Greece and how investors can take advantage of the results in an article titled, Two ways to Play Greece. One important distinction for readers in the article is the two ways to play the Greece situation depends on whether one is a trader or an investor. 

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