Saturday, January 06, 2007

Weekend Reading: 1.6.2007

1) Standard & Poor's website contains an article on low volatility (the VIX) vis-à-vis the strong global equity market returns achieved over the past several years. The VIX is certainly trading at low levels.

(click on chart for larger image)

Chart source: Standard & Poor's The Outlook, January 10, 2007 ($)
From Standard & Poor's Equity Research. Financial markets are driven by what John Maynard Keynes called "animal spirits," the most powerful being fear and greed. One widely tracked gauge of fear is the CBOE Volatility Index, or VIX, which measures the market's expectations for near-term volatility as conveyed by S&P 500 index option prices. Higher readings point to increased investor anxiety.

Currently, the VIX is trading at multi-year lows, suggesting that fear is in deep hibernation. But when combined with the strength in global markets over the past three years -- the S&P Global 1200 is up roughly 100% since March 2003 -- many market participants are concerned that the complacency implied by the VIX is spreading, leaving global stock markets vulnerable to attack by the dreaded bear. (more)

2) The equity market returns on Friday were impacted by the employment report released on Friday. An important aspect of short term market performance is linked to various government releases of economic data. The link to the article titled, Understanding Economic Statistics, provides insight into the importance of various economic releases that can impact the investment markets. The website, Calculated Risk, contains an analysis of Friday's employment report: Report 1, Report 2.

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