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Can Fear Be Gone From the Market?

All it took was a mildly positive non-farm payrolls report on Friday morning to drive the CBOE VIX Index below its median value of 17 (measured since 2003). Not only has U.S. equity volatility subsided, but so has the volatility of volatility measured by the VVIX Index and the CBOE SKEW, a measure of tail risk. Both suggest the probability of a significant crash in the U.S. equity market is dissipating.

Figure 1. VVIX and SKEW since January 2015


So it appears that fear has gone from the market in spite of the bleak signals sent by other economic indicators and the fact that deeper global structural economic problems have yet not been solved.

On other volatility fronts, the TYVIX Index, a measure of Treasury price volatility, also fell below its median as the 10-year Treasury yield edged back to 2 percent. The BPVIX and JYVIX indexes, measures of the volatility of exchange rates of the Dollar/British Pound and Dollar/Japanese Yen, also slipped. Only Dollar/Euro exchange rate volatility, the EUVIX Index, is holding up.

Figure 2. Weekly Update of Volatility measures


Forward Outlook

The forward curve of the VIX Index has now tilted to a stronger contango, while that of JYVIX is in extreme backwardation. The forward curves of the TYVIX, BPVIX and EUVIX indexes look placid.

Figure 3. Term structures of VIX-like volatility indexes