Be Wary of Rebound in Risk Assets and Cooler Volatility Indexes
• The S&P 500 has held its floor at 1,800 and mounted strong intraday rallies like that seen on Wednesday
• Volatility measures like the VIX seem to signal reduced fear, but these indicators are not good leading measures
• Underlying conditions - fundamental, technical, systemic - present a market at risk of sudden reversions to unwinding
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A rebound in risk-oriented assets (S&P 500, high-yield) and retreat in implied risk measures (VIX) seems to paint a picture of improved market conditions. And, given the rout investors have seen these past months and years; there is a lingering fear of missing an opportunity to enter the revival of sidelined sentiment trends. Yet, prices leveling out and 'insurance costs' falling are not in themselves evidence that conditions have improved enough to support the value investor, buy-and-hold mentality of past years. The shortfalls of measures derived from speculative assets themselves are open to the same misinterpretation, distortion and speculation as the underlying themselves. In today's Strategy Video, we look at the false sense of security that comes with pauses in certain risk trends and the unwarranted leverage from popular measures like the VIX volatility index. We also discuss what the risks may truly be from a price, fundamental and systemic perspective.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.