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

Oil whacked

At noon: Oil whacked

Monday, July 07, 2008
Sorry, Canada, but you can't blame investors around the world for celebrating the tumbling price of oil on Monday, which sent U.S. indexes slightly higher at midday but has put Canada's benchmark index into a tizzy.

Oil fell to – can you believe it? – the low-low price of $139.57 (U.S.) a barrel in New York, down $5.72 a barrel,[amp]nbsp;possibly because of reduced fears that Iran is about to join the nuclear club, and possibly because investors have the impression that the G8 annual summit will somehow put the global economy back on track. Whatever the cause, oil is still not cheap, but it's moving in the right direction to remove some of the uncertainty surrounding inflation and corporate earnings.

The Dow Jones industrial average rose 63 points, or 0.6 per cent, to 11,351. The broader S[amp]amp;P 500 rose 4 points, or 0.3 per cent, to 1267. Both indexes were heading down again, though. Technology stocks were the clear favourites, after Microsoft Corp. said it would consider taking another run at Yahoo Inc. Yahoo shares rose 11.7 per cent, Apple Inc. rose 2.3 per cent and International Business Machines Corp. rose 2 per cent.

In Canada, the commodity-heavy S[amp]amp;P/TSX composite index fell 117 points, or 0.8 per cent, to 13,893. Energy stocks were by far the biggest drag, with the sub-index tumbling 2.1 per cent. In particular, Canadian Natural Resources Ltd. fell 2.9 per cent, EnCana Corp. fell 2.4 per cent and Canadian Oil Sands Trust fell 4.6 per cent.

However, Potash Corp. of Saskatchewan Inc. provided some relief, rising 1 per cent and contributing 18 points to the benchmark index.


© Copyright The Globe and Mail

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