Deals, more deals, higher prices for the latest deal or corporate willingness to step-up and make strategic acquisitions are all reasons helping deliver a stellar start to the week. For investors that means a swift return to confidence on Monday helping drive the S&P 500 index to a new record high. And as welcome as new highs may be, the chart below captures growing suspicion even as investors raise the roof. The CBOE Vix index at 14.02 is lower to start the week, yet remains above where it traded when stocks peaked in January (12.28) and the week after the Thanksgiving break (13.70).
Chart – New heights, VIX stays relatively firm
(click to enlarge)
Some of investors’ suspicions are well founded. The emerging market drama, accompanied by episodes of fear ranging from Fed tapering and a Chinese slowdown, remains a concern and earlier in the month forced the Vix to as high as 21.44 on fears of outright panic. Yet it seems that investors are coming to terms with the policy path of the Fed under its new leadership, which in turn is maintaining a lid on treasury yields.
January and the earlier part of February saw options volumes soar across the exchanges as investors bought protection to defend against portfolio losses during days when markets remained highly correlated. And as that correlation comes away the price of both speculation and protection is fading. That’s actually not a bad thing for ardent bulls and resolute bears. For the bulls the spring time might yet see the economy snap back quickly as the spring arrives and help further the bull market. While for bears frustrated by the lack of follow-through when correlations surge, preparing for the next lunge is still inexpensive – just not as cheap as before. Maybe we really are getting back to normal.