By Agency Reporter

Monday, 25 Oct 2010

NEW YORK: United States stocks could see big swings to the downside next week on any remotely ‘bad’ news since volatility indexes are at levels considered too low. 

According to a Reuters on Saturday, investors also will face a blizzard of earnings, which many analysts believe will continue to support the rally that began early this month.

But any disappointments in either earnings or outlooks could, of course, trigger a sharp sell-off.

What‘s more, the market is likely to continue to garner support from investors‘ hopes that the Federal Reserve will take more steps to stimulate the economy, in what‘s known as ‘quantitative easing’ or ‘QE2.’

The Fed is expected to unveil its initial commitment under QE2 at its November 2-3 meeting.

The Chicago Board of Options Exchange Volatility Index, or VIX , a gauge widely used to measure investors’ anxiety levels, fell by 2.54 per cent on Friday to close at 18.78, its lowest level since April.

The VIX, which rose to near 50 in May, has been around or under 20 for the past two weeks.

Options traders note that there is a clear sign of extreme complacency in the VIX and that it is making the market more vulnerable than before.

”The ‘market volatility’ index will see a lot more volatility (next week) since it is at such low levels now,” said Steve Claussen, chief investment strategist at online brokerageOptionHouse.com.

The iPath Standard & Poor 500 VIX Short Term Futures exchange-traded note, or ETN was also at a new 52-week low of 12.83. The ETN offers directional exposure to volatility and is based off of the front two-month VIX futures.

”If you look at VIX futures, investors seem to be always preparing for something to trigger the volatility to spike up again, yet there is nothing major in the immediate future that justifies that,” Claussen said.

The VIX futures were traded at around 21 for November and 24 for December, but going into 2011, they were showing an increase of 40 per cent, trading above 26.

The VIX, widely known as Wall Street‘s fear gauge, is a 30-day risk forecast of stock market volatility. The index typically has an inverse relationship with the S&P benchmark as it tracks option prices that investors are willing to pay as protection on the underlying stocks.

Earlier this week, the VIX instantly shot up nearly 12 per cent when stocks suffered their steepest one-day decline since August after a surprising rate hike from China.

Source: Punch