VIX bets post biggest rally in 7 weeks as S&P 500 tumbles

VIX ETF climbed 12%

New Highs

The S&P 500 will climb to new highs as individual investors add money back to mutual funds, according to Randall Warren of Warren Financial Service in Exton, Pennsylvania. While about $18.4 billion was sent to U.S. stock mutual funds in January, the deposits shrunk to $1.1 billion for February and March, according to the Investment Company Institute.

“Investors should be in this market,” Warren, who oversees about $80 million including options as chief investment officer of Warren Financial Service, said April 12 by phone. “The market is showing incredible resilience and it will likely keep going up.”

Strategists from Goldman Sachs Group Inc. to Morgan Stanley and Deutsche Bank AG have increased their S&P 500 forecasts for the year. Garry Evans of HSBC Holdings Plc raised his estimate on April 9, predicting the index may rise to 1,680 by the end of 2013.

Less Optimism

Individual investors are less optimistic. Expectations that stock prices will fall over the next six months increased 26 percentage points to 54.5 percent last week, the highest level of bearishness since July 2010, according to a survey released last week from the American Association of Individual Investors.

Payrolls grew by 88,000 in March, the smallest gain in nine months and less than the most-pessimistic forecast in a Bloomberg survey, Labor Department data showed April 5. Retail sales fell 0.4 percent last month, according to the Commerce Department, and the Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 72.3 in April from 78.6 a month earlier.

Wagers that U.S. stock volatility will rebound have reached a three-year high. The number of VIX calls outstanding rose to 7.31 million on April 9, more than three times the number of puts, according to data compiled by Bloomberg. That’s the highest ratio of calls-to-puts since February 2010.

All five most-owned VIX contracts were calls. April 20 calls, with an exercise level 16 percent above the last close, and April 18 calls has the largest open interest.

“Hedging is cheap,” Brian Bier, head of equity derivatives sales and trading at Macro Risk Advisors LLC, said in an April 12 telephone interview in New York. “More people are taking advantage of the cheap volatility to express directional views to the upside in the VIX.”

Bloomberg News

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