Bloomberg News

S&P 500 Correlation Bets Increase as VIX Rebounds 22%

April 09, 2012

The S&P 500 has risen  26 percent since then, including its biggest first-quarter gain since 1998. Photographer: Jin Lee/Bloomberg

The S&P 500 has risen 26 percent since then, including its biggest first-quarter gain since 1998. Photographer: Jin Lee/Bloomberg

Options traders are speculating the lockstep moves in U.S. equities that punished investors last year are on the way back as the benchmark volatility gauge posts its longest streak of increases since 2003.

The Chicago Board Options Exchange S&P 500 Implied Correlation Index rose 14 percent in nine trading sessions to 66.64 yesterday, rebounding from a 10-month low and posting the biggest gain since August, data compiled by Bloomberg show. The gauge uses options to measure expectations about whether Standard & Poor’s 500 Index stocks will move in unison. At the same time, the Chicago Board Options Exchange Volatility Index, or VIX, has surged 22 percent since March 28.

Links among stocks diminished after climbing to a record in 2011 on concern European leaders were failing to contain their debt crisis. Options traders are betting they will tighten after U.S. employers added the fewest jobs in five months and analysts projected the weakest earnings growth since 2009.

“We have renewed fears about political and macroeconomic events,” Brian Jacobsen, who helps oversee $211 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, said yesterday in a phone interview. “It makes sense that implied correlations are increasing.”

Stocks moved in unison last year by the most since at least 1980, according to data compiled by Birinyi Associates Inc. The average correlation coefficient between the index and its 500 companies increased to 0.86 on Oct. 10, a week after the benchmark gauge for American equity hit a one-year low and the VIX reached a high of 45.45. The relationship tightened as the S&P 500 plunged 19 percent between April and October.

Best Since 1998

The S&P 500 has risen 26 percent since then, including its biggest first-quarter gain since 1998. The gauge for U.S. equities touched 1,419.04 on April 2, reaching its highest level since May 2008, after reports showed retail sales and manufacturing improving while unemployment falls.

Rallying stocks pushed the CBOE implied correlation index down to 58.26 on March 26, its lowest level since May, from a record high of 83.94 on Dec. 16. It then rebounded in the past two weeks.

The VIX rose 13 percent to 18.81 yesterday, its highest level in a month, after employers in the U.S. added 85,000 fewer jobs than the median economist projection, according to data compiled by Bloomberg.

“We’re in a corrective phase and people are protecting themselves,” Bob Baur, chief global economist at Principal Global Investors, which oversees about $242 billion, said yesterday in a phone interview. “The economic data is softening and there’s a lot of risk in the market.”

Fed Statement

The benchmark gauge of American options prices has risen seven straight days, the longest streak since 2003. Last week, it advanced as the S&P 500 completed its biggest drop of 2012. Stocks slumped during the holiday-shortened week after the Fed signaled it will refrain from further monetary stimulus.

Equities fell and the VIX advanced as concern about the European debt crisis intensified last week. Spain, the fourth- biggest economy in the region, sold 2.59 billion euros ($3.4 billion) of bonds at an auction, near the minimum. Spain is in “extreme difficulty,” Prime Minister Mariano Rajoy said April 4, raising the possibility of a bailout.

Profit growth at S&P 500 companies slowed to 0.8 percent in the first quarter, according to estimates for per-share income compiled by Bloomberg. That compares with a 4.9 percent increase for the last quarter of 2011, the data show.

Earnings Season

Alcoa Inc. (AA:US), the biggest U.S. aluminum producer, will become the first Dow Jones Industrial Average company to post first- quarter results today. Options are pricing in a 6 percent rise or fall (AA:US) in the stock tomorrow, following the report, according to data compiled by Bloomberg. That compares with the average move of 2.4 percent after the last eight quarterly statements, data compiled by Bloomberg show.

The 30-day correlation for the S&P 500’s 50 biggest stocks more than doubled to 0.42 on April 4 from the one-year low seen on Feb. 8, data compiled by BMO Capital Markets Corp. show.

“It’s a little bit of a worrisome sign,” Max Breier, a senior equity derivatives trader at BMO in New York, said in an April 4 telephone interview. “Given the high correlation, any kind of a pattern of earnings shortfalls could lead to an accelerated downside move.”

Improved Outlook

The Fed last month upgraded its assessment of the economic outlook. U.S. consumer confidence climbed to the highest level in four years in the week ended April 1, the Bloomberg Consumer Comfort Index showed on April 5, while manufacturing in the nation expanded at a faster pace in March and retail sales rose in February by the most in five months.

“Everything we’ve seen recently in the market can be contained within the confines of what we call a healthy break,” Christopher Johnson, chief investment strategist at Johnson Research Group LLC in Cincinnati, said yesterday in a phone interview. “On balance we are seeing improvements in the economy,” he said. “Investors will always find something to worry about.”

Options traders have been increasing protection for their S&P 500 gains, bringing the cost of bearish contracts to the highest level in almost five years versus calls.

Implied volatility, the key gauge of prices, for puts 10 percent below the S&P 500 rose to 22.88 on April 9, while the measure was 14.42 for calls 10 percent above, according to data on six-month contracts compiled by Bloomberg. That brought the price relationship known as skew to 1.59, close to the 1.64 level from March 13, which was the highest since May 2007.

Getting Nervous

The ratio of outstanding puts to sell the S&P 500 versus calls to buy rose to 1.95-to-1 on April 4 after reaching 1.97 last month, the highest since October 2008, the data show.

“People are starting to get nervous again about the big macro drivers,” George Feiger, chief executive officer of Contango Capital Advisors Inc., the San Francisco-based wealth management arm of Zions Bancorporation, said in a telephone interview on April 5. He manages about $3.3 billion at Contango and Western National Trust Co. “It becomes much more important to do the risk-on, risk-off trade than to make subtle discriminations between companies.”

To contact the reporters on this story: Cecile Vannucci in Amsterdam at; Nikolaj Gammeltoft in New York at

To contact the editors responsible for this story: Nick Baker at; Andrew Rummer at

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Companies Mentioned

  • AA
    (Alcoa Inc)
    • $15.94 USD
    • 0.16
    • 1.0%
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