- The Volatility Index (VIX)measures optimism versus fear in the
market. VIX is based on data collected by the Chicago Board Options
Exchange (CBOE). It gives traders a better understanding of investor
sentiment and serves as an early warning sign of possible reversals in the
market.
What it shows now: "The VIX normally goes up to 40 when times are bad, but during the worst of the current downturn, it went to 90," Mr. McDonell says. "We are currently back around 50 -- but for the picture to look good, it needs to go lower -- to around 25 or 30."
"In other words, according to the VIX, the current market rally doesn't mean we've hit bottom," he says.
What investors should watch for: Volatility hurts mutual funds in particular, "there will be no long term reversal until mutual fund money is back in the game," he says. - The TED Spread shows the difference between the interest rates
on interbank loans and short-term U.S. government debt (T-bills). The
interbank loan rate used is the London Interbank Offered Rate or LIBOR.
"The TED spread is an indicator of perceived credit risk in the general
economy," Mr. McDonell explains. "When the TED spread increases -- when
the interbank rate is higher than the T-bill rate -- that's a sign that
lenders believe the risk of default on interbank loans is increasing; a
decrease in bank defaults lowers the LIBOR and results in the decrease of
TED spread." The long-term average TED spread is 30 basis points (3/10 of
1 percent), with a normal high of 50 basis points.
What it shows now:In October 2008, as the credit crisis spread, banks were afraid of each other, and the TED spread hit an all-time high of 465 basis points, reflecting high interest rates and an almost total shutdown in interbank lending. Since then, the U.S. Federal Reserve has helped bring the TED spread down by direct support for banks and by encouraging interbank lending. But interest rates on T-bills remain low and have been driven lower by the Fed's $300 billion purchase of 10-year notes, reducing the TED spread below 100 for the first time since the crisis began. There is still room for improvement.
What investors should watch for: The TED spread needs to get lower. This will happen as credit markets continue to thaw, and as Treasury yields rise when investors begin to sell their Treasury positions to move money back into the stock market. - The Yield Curve shows the interest that investors can expect
from Treasuries over time. A normal curve goes up sharply for short-term
T-bills, then levels off more gradually since the yield for medium- and
long-term T-notes should stay relatively level, rising only very slowly
from the 5-year to the 30-year note. A healthy yield curve starts low with
3-month returns and slopes upward as time to maturity increases all the way
up to a 30-year bond.
What it shows now: The current Yield Curve is misshapen with a dip in the middle because the Fed's massive purchase of 10-year T-bills drove yields down (interest rates on bonds go down as prices rise). Overall yields are low because of the demand for Treasuries as investors seek shelter from the risks of the stock market. The Fed's actions have flattened the yield curve.
What investors should watch for: A return to a normal Yield Curve as money begins to flow back into the stock market and out of Treasuries. Heavy selling of Treasuries will bring interest rates back to normal levels.
- The USD and the JPY falling.
- The stock market rallying and Treasuries crashing.
- Gold rising, along with the AUD. (Australia is rich in commodities and will benefit from a mini-commodities boom.)
Contact Information: Contact: Itay Engelman Sommerfield Communications (212) 255-8386 itay@sommerfield.com