Remember the much-maligned fear barometer created by Credit Suisse?
It was meant to be a measure of investor nervousness — but moved practically inversely to the Vix.
While the Vix was not designed to measure investor ‘fear’, it remains the standard gauge of market nervousness, measuring 30-day expectations of volatility. In contrast, the Credit Suisse barometer, or CSFB, attempts to quantify ‘fear’ by measuring the degree to which demand for downside and upside insurance is skewed. If investors want to pay more for downside protection relative to upside, the CSFB will be higher. If CSFB is low, insurance is cheap.
Anyway, Sentiment’s Edge have noticed something interesting: while the Vix is at a six-month low, the CSFB is now at a six-month high:
So what, you might think. The CSFB could still be a bust. True, but Sentiment’s Edge also have this tidbit on a purported historical pattern:
There have been four other times during a bear market when we’ve seen a divergence like this, when the VIX is at a multi-month low, but the CSFB Fear Index is at a multi-month high. Over the next three months following those four instances, the S&P averaged -9.2%, and with a risk that averaged more than 6 times greater than the average reward.
We’re still a bit dubious, but the good news is we will have the result of the battle of the fear barometers in three months’ time.
Related links:
Biggest Vix drop hides options bets S&P 500 will fall – Bloomberg
Interest in Vix spikes as volatility declines – Vix and More
Vix challenger – FT Alphaville