U.S. and European Fear Indexes Both Drop

Well, supposedly the problems in Europe are solved again (until next week anyway). As a result, the VIX and the corresponding “Fear Index” for the European market, the VStoxx Index, have dropped significantly. Personally, I wouldn’t hold my breath. Check out he following article.

The market’s fear gauge was poised Wednesday to finish the trading session with its most placid reading in three weeks as U.S. stocks soared while investors cheered a raft of developments in Europe, the U.S. and China.

The Chicago Board Options Exchange Volatility Index fell 7.8% to 28.24 in early afternoon trade, on pace to close below the psychologically significant 30 level for the first time since Nov. 8. The VIX is down 18% this week.

The S&P 500 rose 42 points, or 3.5%, to 1237 after the world’s major central banks announced a unified plan designed to free up emergency dollar loans for Europe’s banks, a move to release pressure on global markets. The joint action built on positive investor sentiment stemming from the announcement that China would cut bank-reserve requirements for the first time in three years, a move likely to free up bank lending. Additionally, a U.S. labor-market report showed private-business hiring made its largest monthly gain of 2011 in November.

“What the markets have been waiting for is some sort of assurance that Europe isn’t going to fall apart this year. That’s off the table in 2011, and the VIX reaction is like a sigh of relief,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab.

The VIX measure the prices investors are willing to pay for options on the Standard & Poor’s 500-stock index, often as portfolio protection. Lower readings imply less willingness on the part of investors to pay up to hedge portfolios against choppy trading.

The VIX has been elevated to well above its historical average of around 20 since Standard & Poor’s cut its rating on U.S. government debt in August, a reflection of extreme investor concern about future stock swings.

“I think today’s move is substantial–the VIX has been almost completely above 30 back since the beginning of August, and seems to have had a difficult time closing below 30,” Mr. Frederick said.

Exchange-traded notes designed to move with the VIX similarly declined. The largest of the products by assets, the iPath S&P 500 VIX Short-Term Futures ETN (VXX), fell 7.7% to $42.36. ETNs are debt instruments that trade like stocks, or exchange-traded funds.

Volatility gauges based on options protection for European stocks fell as bourses soared. The VStoxx Index, which measures the cost of protective options on the Euro Stoxx 50 stock-index, fell 4.1% to 37.08, its lowest reading in one month. The index of Europe’s blue chips rose 4.3%.

See the Wall Street Journal Blog for more

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