VIX or Equity PC Ratio — which one will you side with?

The market is still at the crossroads. The bears are currently winning but sentiment is very mixed: for example, the Put Call Ratio is quite high, the highest it has been since the same period of the year, but back in 2009 ! Yet, the VIX is very low. This is quite odd.

June 16 (Bloomberg) -- It took six weeks of equity losses, a series of lower-than-estimated economic reports and political turmoil in Greece to finally drive the options gauge known as the VIX above its long-term average.

The Chicago Board Options Exchange Volatility Index rose 17 percent to 21.32 yesterday, topping its 21-year mean of 20.34 for the first time since March 21, according to data compiled by Bloomberg. The VIX averaged 17.44 since the Standard & Poor’s 500 Index, the benchmark measure of U.S. stocks, began falling after reaching an almost three-year high on April 29.

The options measure failed to surge even after the Citigroup Economic Surprise Index sank to minus 117.20 this month, meaning data missed projections in Bloomberg surveys by the most since January 2009. The response shows there’s no panic among investors buying and selling equity derivatives after the S&P 500 fell 7.2 percent in the past month and a half, according to traders and strategists at Goldman Sachs Group Inc., BNP Paribas SA and Sterne Agee & Leach Inc.

The move down was gradual, and there was no panic,” said Alex Panagiotidis, managing director for equity derivatives at Sterne Agee in New York. “When the move is gradual, there’s no panic, so the VIX doesn’t go up as much.”
Stability in the VIX signals that the S&P 500’s six-week slide, the longest in three years, isn’t convincing investors that stocks are headed for a bear market. The index lost an average of 6.5 percent in the past year’s four biggest slumps, which averaged 17 calendar days in length, then rebounded by an average of 12 percent through the next peak.

“There wasn’t a panic trade because funds had already lowered their exposure,” said Layla Peruzzi, vice president for equity derivatives at Jefferies Group Inc. in New York. “When the market went lower, we had people selling options they already owned. They weren’t scrambling for protection. They were being very calm about it. Investors are pretty comfortable.”
You’re still not seeing a lot of demand for downside S&P puts,” said Dan Deming, a VIX options trader at Stutland Equities LLC on the CBOE floor. “It’s almost like the market’s in denial and it’s very strange and causing a little bit of apprehension. There’s a lot of confusion and people aren’t sure how they want to position themselves.”
We don’t see any put buying, and instead we’ve been seeing people buying calls, even at current levels,” he said. “That’s not good for stocks. It can be more neutral. If you look at the actual options hedging activity in the indexes, there’s not much going on. We believe that’s a sign of complacency, although it can also mean that investors have enough hedges on.”
The market isn’t completely buying into a prolonged decline,” said Max Breier, equity derivatives strategist at BMO Capital Markets Corp. in New York.

It’s been a very orderly selloff and people haven’t really felt any panic,” said Dominic Salvino, a specialist at Chicago-based Group One Trading, the primary market maker for VIX options. “The overall news is just more of the same: Weak job creation, intractable housing problems, uncertain regulatory environment, etc. -- nothing that represents a shock to the system.”
Another oddity? During the decline, the dollar dropped against most currencies. That's not typical of the risk-off, fear driven action.

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