stock market volatility is sending traders on a rollercoaster ride
Stock market volatility is sending traders on a rollercoaster ride driven by fear that is measured by the Market Volatility Index, or VIX. Photo from Thinkstock.

Tuesday morning the stock market surged on marginally positive consumer confidence data. A few hours later, when the Federal Reserve’s minutes were released, the stock market dove. Reports of growth in U.S. and Chinese manufacturing on Wednesday launched the stock market upward in early hours of trading. Chances are the stock market will dive again on Friday when the Labor Department submits its monthly jobs report. But it may be headed down again by the time you read this. The rollercoaster ride brought a fitting end to the worst August for the stock market since 2001. The Market Volatility Index, also known as the VIX, or “fear index,” jumped nearly 11 percent during the month for its biggest August jump since 2001.

Market volatility and the fear index

The VIX closed Monday at 27.21. It fell 4.3 percent on Tuesday to 24.55. On Wednesday, the VIX rose 4.8 percent to 28.77. MarketWatch reports that because the VIX rises when stocks come “unglued,” traders use it as a measure of fear among investors. The so-called fear index, which can be subject to wild, acute fluctuations, inched higher through August as the Standard & Poor’s 500 lost 4.7 percent. The VIX is vibrating, but the Wall Street Journal said that it’s not close to a level associated with panic mode. The fear index topped 80 after Lehman Brothers collapsed in 2008. It spiked higher than 40 during the stock market “flash crash” in May.

Stock market is twisted and conflicted

When minutes from the last Federal Reserve meeting were released, they revealed that the Fed was uncertain about the U.S. economic outlook and what to do about it. U.S. blue-chip stocks responded in kind, falling to put the finishing touch on the worst August for stocks since 2001. The Associated Press reported that stocks were surging Wednesday after surprising reports of strong growth in U.S. and Chinese manufacturing calmed fears about the global economic recovery. By sending stocks downward through August, traders were betting that weak U.S. economic growth will dent corporate earnings. But since many big companies rely heavily on business overseas, they could benefit from expectations that foreign economies will expand.

Even the experts are confused

After the market’s August swoon, The New York Times reports that Wednesday’s rebound caught experts off-guard. Stephen J. Carl, head equity trader at the Williams Capital Group, told the Times that he assumed the week heading into Labor Day would be quiet. An Institute for Supply Management report that is a crucial economic indicator for American traders showed its manufacturing index unexpectedly rising to 56.3 in August from 55.5 in July. Economists polled by Thomson Reuters had forecast a weaker reading of 53.0. Carl said he was “perplexed” because those numbers shouldn’t be boosting stocks. But reality may be setting in again soon enough. Traders are bracing themselves for Friday’s report on unemployment. The Labor Department jobs report is expected to show the loss of another 100,000 jobs. The unemployment rate is expected to rise to 9.6 percent. The VIX is expected to respond in kind.

Sources

MarketWatch: http://www.marketwatch.com/story/vix-notches-biggest-august-rise-in-over-a-decade-2010-08-31?dist=afterbell

Wall Street Journal: http://online.wsj.com/article/BT-CO-20100825-709386.html

Associated Press: http://www.google.com/hostednews/ap/article/ALeqM5jmT59dgLTTziX4p9X9MRBRpWZGdQD9HV60602

New York Times: http://www.nytimes.com/2010/09/02/business/02markets.html?partner=rss&emc=rss

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