The S&P 500 index itself was nearing all-time highs once again at the time of writing (Friday 28 April), propelled by the FANG stocks of Facebook, Apple, Netflix and Google’s owner Alphabet.
With Donald Trump promising massive corporate tax cuts and the recent French elections indicating a clear win for a pro-business candidate, the macro signs are positive lately.
Putting aside geopolitical tensions surrounding North Korea, Russia and the Middle East, it is not difficult to see why traders are confident.
But are people really expecting plain sailing to the degree the VIX indicates?
‘Articificially low’
Henderson Global Investors’ James de Bunsen, who runs absolute-return, multi-asset funds, said the VIX index may be misleading if considered in isolation.
For a start investors should consider the shape of the curve on the index, not just its absolute levels compared to history, he said.
Secondly he said that, owing to the fact the VIX index itself can today be traded by speculators through vehicles such as ETFs, it does not provide an untainted reflection of expectations.
The VIX index’s spot price is today “artificially low for a number of reasons”, he said, including current opportunities for short-sellers to generate high returns by speculating on the index.
De Bunsen said investors should consider put-to-call ratios, which indicate whether traders are tending to buy protection against possible losses or capitalise on future gains, as well as the VIX.
Taken together, these indicators currently do suggest investors are relaxed but not to the great extent implied by the VIX, he added.
