The Only Thing to Fear is a Lack of Fear

While we haven't reached panic mode, that doesn't mean the market isn't fearful

by Adam Warner

Published on Jan 22, 2016 at 9:51 AM

One of the biggest reasons to panic right now remains the utter lack of panic. Yes, the CBOE Volatility Index (VIX) has lifted lately, but not nearly to to extent one might expect given the very ugly market backdrop. We noted this the other day, though more that VIX was simply rising in line with the market declines.

Well, maybe volatility is downright underperforming. This, from Steven Sears in Barron's (subscription required):

"Some investors are using options to hedge their portfolios, of course, and some are selling puts to buy stocks at lower prices, and others are buying calls on stocks they have sold. But nothing in the options market clearly suggests stock investors have decided they cannot take it anymore.

"The Credit Suisse Fear Barometer, in fact, is at [a] level that suggests investors are still relatively calm about the future of the stock market. The barometer, which measures index options volatility to indicate investor sentiment over the following three months, just set an annual low of 26%. This suggests investors who are active in options on the Standard & Poor's 500 Index are not concerned that the market will be sharply lower over the next three months."


Options have been "smarter" lately, as I noted. But like everyone else, I don't expect this move to end on anything less than a serious fear spike.

We do have some "good" news to report on that front. The CNN Fear & Greed Index has flipped to "Extreme Fear."


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What's more, all but one of their components is in "Extreme Fear." And that one component? Put and call options, of course:

"During the last five trading days, volume in put options has lagged volume in call options by 18.34% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating fear on the part of investors."


That qualifies as simply "Fear", though frankly that hardly sounds exceptional. Rather, that feels like investors want to fade this with call purchases. ISEE, which measures public opening trades only, is low -- but again, not terrible:


160122agw2

It's a call/put index, so lower means relatively fewer calls purchased. We've dropped, but considerably less than in the fall, and less than other assorted drops in the last two years. It all does suggest there's fear around, just not a crescendo of fear.  

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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