Control Panel: Dispersion rising

What Is Volatility?

Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured from either the standard deviation or variance between returns from that same security or market index. …

Market volatility can also be seen through the Volatility Index (VIX), a numeric measure of broad market volatility. The Chicago Board Options Exchange created the VIX as a measure to gauge the 30-day expected volatility of the U.S. stock market derived from real-time quote prices of S&P 500 call-and-put options.8 It is effectively a gauge of future bets that investors and traders are making on the direction of the markets or individual securities. A high reading on the VIX implies a risky market.[end quote]

I track VIX in the weekly Control Panel because a suddenly spiking VIX indicates a shaky market and a high spike in VIX coupled with a high financial stress index is a sure sign of a financial crisis.

The broad market VIX is based on the aggregate of 500 stocks included in the SPX. The Cboe S&P 500 Dispersion Index (DSPX℠) measures the expected dispersion in the S&P 500® over the next 30 calendar days, as calculated from the prices of S&P 500 index options and the prices of single stock options of selected S&P 500 constituents, using a modified version of the VIX® methodology. This may sound like the same thing as VIX but instead tracks the volatility of the stocks separately.

Beneath the Calm Market, Stocks Are Going Haywire

Only once in the past 25 years have individual stocks swung about so much while the overall market stayed placid

By James Mackintosh, The Wall Street Journal, Updated June 9, 2024

It is easy to look at the piddling daily moves in the S&P 500 and think the market has been oh-so-boring recently. There hasn’t been a 2% move since February and the VIX gauge of expected volatility is only up a bit from the postpandemic low reached last month.

Under the calm surface, however, there is furious paddling. Only once in the past 25 years have stocks swung about like this while the overall market stayed so placid. Traders in the options markets are betting on its continuing: Prices indicate the biggest swings in stocks for at least 10 years relative to the prevailing calm for the S&P 500. [The DSPX is the CBOE’s dispersion index.] …

The S&P is serene.

At the same time, investors are trying to pick the winners and losers from higher-for-longer interest rates and AI. There are enough stocks that do well or badly from interest rates to move share prices around a lot, but they largely cancel out at the index level. This shows up in stock options that are priced for very low correlation between them—the lowest for the year ahead since at least 2006… [end quote]

About half the money in the stock market is invested in passively-managed index funds. An S&P 500 index fund volatility will follow the VIX. Historically, passive index funds have outperformed active stock picking. (Especially actively-managed mutual funds which also have higher expenses than index funds as well as worse performance over time.)

The big difference between the VIX and the DSPX shows that individual stocks are having much bigger swings than the averaged-out SPX. Investors could potentially increase their returns by selecting stocks which could have larger gains than the overall market – or larger losses, since the gains and losses average out in the VIX.

The big news of the week was the higher-than-expected employment report. Total nonfarm payroll employment increased by 272,000 in May, and the unemployment rate changed little at 4.0 percent. This was higher than the previous month. The Federal Reserve won’t cut the fed funds rate with such strong employment so interest rates suddenly popped though not as high as a couple of weeks ago. The yield curve is close to flat.

USD rose and gold fell. Oil prices have been falling and natgas rising.

The stock indexes didn’t change much and are still in a rising trend.

The Fear & Greed Index is neutral but trending toward Fear. The trade is neutral, neither risk-on nor risk-off.

Financial conditions are loose and getting looser. This is supporting the rise in asset prices. The Chicago Fed’s National Financial Conditions Index (NFCI) provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems.

CAPE shows that the stock market is still in a historic bubble.

A market which is in a bubble with high dispersion is vulnerable to a sudden reversal as shown by many panics in the past. Be careful out there, especially if you are trading individual stocks.

The METAR for next week is sunny.