Facebook (FBWealth Strength IndexFB is Extremely Down and trending Down) falls almost 20%. Netflix (NFLXWealth Strength IndexNFLX is Extremely Down and trending Down) tumbles 14%. Twitter (TWTRWealth Strength IndexTWTR is Moderately Flat and trending Up) is down 21% on earnings. Intel (INTCWealth Strength IndexINTC is Extremely Flat and trending Down) finished today down 9%.
And yet the CBOE Volatility Index (VIX), which measures the price that traders are willing to pay to hedge risk VIX, the so-called fear index?
Here’s my best shot at making sense of the divergence.
The VIX is a measure of the implied risk in the general market as represented by the S&P 500 stocks. The S&P 500 itself has ben remarkably positive in the last two weeks, even in the face of negative earnings news and big drops in selected high-price to earnings ratio, high growth market leaders. The VIX and the S&P 500 have been behaving as if investors and traders think that the problems in the market are limited to stocks like Facebook, Netflix, and Twitter. The economy (let’s hear it for 4.1% annual GDP growth) is still very solid. Projected earnings growth for the next quarter is even slightly higher than the 20% growth projected for this quarter. No reason, yet, to spend money hedging the risk for the general market.
I think this is a misreading of the current situation.
Yes, the problems at Facebook, and Netflix, and Twitter are specific to those companies. I wouldn’t extrapolate from the slowdown in user growth at Facebook and Twitter to some problem with the general economy.
But companies outside that group have been flagging problems for the quarters ahead even if their warnings and any downward moves in their stocks have been overshadowed by the news from Facebook and Twitter and Netflix.
General Motors (GM) and Illinois Toolworks (ITW), for example, have raised red flags about revenue growth and climbing costs in the rest of the year.
The market has chosen to look past those warnings so far.
I don’t think that’s a good reason for you to do the same–whatever the VIX may be saying about risk and volatility.