The chair has many times pointed out how the vix level is an indication of future moves on the SPX. The VIX seems to be under great pressure here, even with yesterday 2% fall on the SPX the VIX was down, that must be highly unusual. Just an observation.

Greg Calvin writes: 

 It seems there have been numerous unusual moves in VIX recently. Similarly, today's VIX movement thus far is interesting in contrast to the market's paint-drying picture, and the relative movement in contrast to for example, yesterday's relative moves intraday.

Vitaliy N. Katsenelson writes:

I've met a money manager yesterday who explained to me that the decrease in risk premium is driving the market up (and vice versa). He showed me a nice chart that displayed risk premium as inverse P/E (earnings yeild) less 10 year Treasury. This major problem with that concept is that E over last 3-5 years did not really represent a true earnings power of S&P, it overstated it. P/E was too low. Margins reverted towards the mean -declined, E declined and took market with it. I'd suggest to use a ten year traling P/E, at least it will cover the full economic cycle and thus margins will be normalized and P/E (or earnings yield) will be more meaninfull.





Speak your mind

1 Comment so far

  1. Chris Monoki on April 25, 2009 10:23 pm

    The (equity) risk premia is still a puzzle, and to this date, no one can precisely measure it.

    The biggest folly is the belief that the VIX is a measurement of risk premium. Gents, it’s not, and if you think that, then with all years of experience, you might want to go back for some re-education. Bottomline, market volatility is not a measure of risk premium.

    I’ve grown tired of the VIX as a measure of anything. The only reason why I pay attention to it is that there are investors that still believe and bank on it. It moves the markets, and thus I’m compelled to pay attention to it.

    Vitaliy, you’re friend showed you nothing proprietary, only the Federal Reserve’s equity risk premium model. My three-staged dividend discount model (better labeled as an earnings capitalizaton model), incorporates the very same method, and is used with other measurements. My Lord, I wouldn’t dream of showing that without the proper disclaimer that it’s not mine.

    Equity risk premium is, to me, the name of the game for investors (not speculators). If I applied a 5.6% ERP (historical approximate, according to Ibbotson), my model would give roughly 1200 fair value on forward-looking earnings. If, however, I used 7.2%, which is roughly the Fed’s model, then I get around 700 on the SPX. The variance is too great to bank on with any level of confidence.

    What you want to do is create a matrix of various discount rates to various forward earnings estimates. Then you’ll get a range. With that you can get confidence: should the market move to the extreme, search and assess. If you’re confident in your estimates, that’s when to move.

    I moved 50% monies into stocks early March. As of Thursday, I’m back into 100% cash. The stock market neared the both extremes. I have no clues what direction the market will take, but I’ll leave the bottom and top 20% to the market, and will play the 60% in between, protecting both principal and gains.

    Keep pressing,
    Chris Monoki


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