Black Swan Risk
this week, we looked at the
CS Fear Barometer. This alternate gauge of options traders'
uncertainty shows that S&P 500 traders are bidding up the value of put
While that sounds like it should be a
contrary indicator, it's not. This has proven to be the "smart
money". When the CSFB hits a high while the "common man" VIX is
pricing in low volatility, stocks usually tumble afterward.
Disturbingly, the VIX has crumbled 15% in
the past two days, while the CSFB just hit a new all-time high. In
other words, traders are paying a record high amount for 3-month
Also concerning is another black swan-type
of indicator, the SKEW index from the Chicago Board Options Exchange.
From the CBOE:
The CBOE Skew Index is an option-based
indicator that measures the perceived tail risk of the distribution
of S&P 500 returns at a 30-day horizon. Tail risk is the risk
associated with an increase in the probability of outlier returns -
returns two or more standard deviations below the mean.
At a normal skew level of 100, the
probability of a black swam event during the next 30 days is 2.3%.
But the latest value of the SKEW is 130.
At that level, the probability of a black swan event is 10.4%.
My math may be a bit off here, but the VIX
is suggesting that the S&P 500 shouldn't move more than about 5% over
the next 30 days.
But the SKEW index suggests that there is
more than a 10% probability that the move will be greater than 10%.
It's certainly not a perfect predictor -
it jumped above 130 many times in 2005 and 2006, with nothing more
nefarious than a flattening out of the uptrend in the S&P 500 as a
result. But the current high level, combined with a new record
high in the CSFB and relatively low level of the VIX, suggests caution.