Volatility: If she's right, it's time to buckle your seat belts.

Volatility? We're just getting started, options say

Boyd Erman, 07/07/08 at 2:20 PM EDT
This is going to sound strange on an afternoon when the SP/TSX Composite is taking another beating (down 331 points and counting) along with other global stock indexes, but the options market says that things haven't been all that volatile lately, though they will be soon.
That's the bad news. The good news is that as volatility climbs, it may signal a bottom in U.S. stocks, says strategist Rebecca Engmann Darst of Interactive Brokers Group LLC

She's watching the Chicago Board Options Exchange Volatility Index, well known as the VIX. The index is up big-time Monday afternoon, jumping almost 8 per cent to climb above 26 for the first time since March. The relative calm of the VIX "despite gathering economic headwinds and grinding losses for stocks" has "flummoxed and frustrated many market participants, who count spikes higher in the VIX for cues to capitulatory selling in the S&P that would signifiy a near-term bottom for stocks," Ms. Engmann Darst wrote in a note to investors.

The jump Monday now has some in the options market snapping up options to buy the VIX at 32.50 in July. For those calls to be in the money, given the 30-cent a contract price, would require another 20 per cent jump in the VIX in just eight days until the contract expires, the strategist notes.

If she's right, it's time to buckle your seat belts.

Energy takes a hit

Investors got another look at what happens to a commodity-heavy stock market index when commodities suddenly fall out of favour:

The S&P/TSX composite index closed at 13,712.8, down 297.59 points or 2.1 per cent - a rough way to begin the first full week of the third quarter.Now, the index is down 0.9 per cent in 2008, putting it under water with the rest of the world's major stock market indexes for the first time since April. But you can't blame the economy on this turn. Instead, it appears to have more to do with a quick retreat from everything from corn to oil:

The Reuters/Jefferies CRB commodity index fell 2.8 per cent, its biggest dip since mid-March with 17 of the index's 19 commodities falling.To be fair, commodity producers weren't the only drags on the S&P/TSX commodity index. Nine of the 10 subindexes were down, as were 82 per cent of the 253 stocks in the broader index.


Financials were mixed, with Royal Bank of Canada rising 1.3 per cent and Canadian Imperial Bank of Commerce falling 2.8 per cent.But energy producers took the biggest hit, falling 2.8 per cent, after the price of crude oil tumbled to $141.37 (U.S.) a barrel in New York, down $3.92. The price briefly dipped below $140. EnCana Corp. fell 4.8 per cent and Canadian Natural Resources Ltd. fell 3.6 per cent.In the United States, the Dow Jones industrial average closed at 11,231.96, down 56.58 points, or 0.5 per cent.

The broader S&P 500 closed at 1252.31, down 10.59, or 0.8 per cent - its lowest close in nearly two years and 20 per cent below its October high, the definition of a bear market.Although energy stocks also took a hit, tumbling 2.3 per cent, the biggest drag were the financials, which fell 3.2 per cent.

Freddie Mac and Fannie Mae fell 17.9 per cent and 16.2 per cent, respectively, on a report from Lehman Brothers that the two troubled mortgage finance companies may have to raise a combined $75-billion - a prospect that soured views on the rest of the sector. Citigroup Inc. fell 2.5 per cent and Bank of America Corp. fell 3.9 per cent.Copyright 2001 The Globe and Mail