an epic week: VIX and redemptions

I submitted a rough cut of my video to SVA last Wednesday and have been whittling down the huge pile of unread Financial Times newspapers in my kitchen.

An aside:  I get the digital FT, too.  But if for an investor the idea is to find out stuff other people don’t know yet, then what you should look for are the short articles on the back pages of the paper–not curation by what’s trending.

Two items stand out to me so far;  VIX readings and mutual fund/ETF redemptions.

VIX

The VIX is an index that tries to measure fear and greed in the stock market by, in my crayon-like understanding, calculating how much the price of puts on S&P 500 stocks exceeds theoretical value (using something like Black-Scholes, something borrowed from the physics of Brownian motion) and dividing that number by the amount that calls exceed their theoretical value.  The methodology was changed somewhat in 2003(?) and I can’t find a clear description of the new one.

People use the VIX as a gauge of market fear, on the idea that when investors are scared the premium on puts goes up and/or the premium on calls goes down.  The all-time high for the VIX  was around 150, posted 4x during the stock market decline of late 1987 (these are new VIX numbers, not those actually posted, which are much lower).  The figures we’re putting up now are the next highest.

In really bad times since then, the VIX has surged above the 40 line.  Last Wednesday it cracked through 80.  There are legitimate questions as to whether the VIX is really the Fear Gauge it is presented as being on stock market programs.  Whatever the case, it indicates market turmoil.

For us as investors, the VIX is important, on the idea that maximum panic by sellers indicates a turning point in the market.  How so?  Sellers either run out of stuff to liquidate or they faint at their desks.  Either way, selling stops.

 

redemptions

There has been a general drift over at least the last decade in the mutual fund/ETF business away from equity funds and into bond funds.  Over the past three weeks or so, however, there has been a huge surge in bond fund redemptions.  According to the FT, for the week ending last Wednesday, investors yanked $109 billion from fixed income funds (a record high), compared with $20 billion taken out of equity products.  A fraction of the money is finding its way into money market funds.  As for the rest, bank accounts?

Again, redemptions of stock mutual funds/ETFs are generally another decent fear gauge.  Bond redemptions are unusual, though, since, in theory at least, as the Baby Boom ages it gravitates more and more to bonds.

Two factors cut against this idea in the present case.  The yield on the stock market is way higher than the yield on bonds.  Maybe more important is the fear, justified or not, that the coronavirus will force fixed-income issuers to default on their obligations.