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The volatility in Wall Street has shown a massive spike in the past one month, while the fear has been visible – a trend which may lead to further downside in the shares.
The volatility index – represented by Chicago Board Options Exchange's CBOE Volatility Index (VIX) – has risen by 33% in the last fortnight. The CBOE’s VIX now stands at 22.18.
The VIX is one of the most sought-after measures of the equity market's expectation of volatility based on S&P 500 index options. The lower the index, the better it is for the markets.
Last year, during the 2020 stock market crash, this index had surged 5x in a month’s time, as bears ruled the street.
Also, the CNN’s Fear to Greed Index has come down to 35, and anything below 40 is considered as fear sentiment in markets. This comes after the post-pandemic stimulus money had shot this index over 80 as well – denoted as extreme greed.
Both these indicators hint at headwinds in stock markets to continue for the next couple of months. These numbers aren’t alone.
The price to earnings ratio for the S&P500 of US currently stands at 43.72. For the uninitiated, this means that investors are paying US$43.85 for every dollar earned by all the S&P 500 companies.
Cut to the far east – the Shanghai Stock Market has a PE ratio of just 16.39.
Now, let us put all this in perspective. Investors in the US – the country that saw a severe recession – are paying 2.5 times more for every penny earned by the corporates than the investors in China, a country which did not see a recession.
There is no doubt that equities are overly heated, and the valuations have skyrocketed as large sums of the stimulus money got diverted towards the global equity markets – even though fundamentals remain an uncharted territory as COVID-19 has not been relenting.
Is it a time for much-needed correction? Definitely, an interesting space to watch out for!
(Note: The data is as of May 19, 2021)
