The selloff in the stock market over the past few days reminds me of a silly song that was chosen as the “class song” in my high school umpteen years ago: “You Can’t Roller Skate in a Buffalo Herd.” When Mr. Market gets anxious, the trading herds start stampeding for the exits, and it’s easy to get caught up in the selling frenzy. So should we push the panic button yet?
It depends on what measures of panic you’re looking at. According to an article in today’s Wall Street Journal, investors are seeking shelter in safe havens like gold and Treasury bonds. But a key gauge of market panic is still “relatively cool.” The Chicago Board Options Exchange’s volatility index, also known as the VIX, is regarded as a measure of just how spooked investors are. The VIX measures how much investors are willing to pay for stock options, which they can use as protection in times of uncertainty. (A stock option gives an investor the right to buy or sell a stock at a certain price by a certain date.)
The VIX tends to pick up in troubled times, and it did jump 13% yesterday (June 26 th ). But though the gauge reached the mark of 23.93, that’s not as high as we witnessed during the wild market selloffs in January and March, when the VIX closed above 30. Some consolation, huh?
Ron Papanek, market strategist at RiskMetrics Group, told the Wall Street Journal that the VIX's less extreme reaction to this selloff means that investors may be comfortable with stocks at these levels. (Rock bottom, to some of us!) Because the VIX measures expectations of future volatility, its relatively low levels could mean traders don't see much more mayhem on the horizon, he concluded.
The other explanation is that traders are like deer caught in the headlights, not knowing which way to run. Or that they just haven’t gotten panicked enough to actually do something.
As for me, I’m not going to try to roller skate in the buffalo herd. But I am going to think about what stocks will do best after the herd has passed through. Maybe a environmental cleanup company that converts buffalo cowpies to fuel. Or a maker of scooters or other energy-efficient vehicles. Does Honda make hybrid roller skates?
