At least one cue now available to investors — the volatility index, or VIX — clearly paints a rather gloomy picture.
The volatility index across the globe rose last week, signalling nervousness and fear among traders. The Chicago Board Options Exchange (CBOE) volatility index based on S&P-500, widely-tracked worldwide, surged 17 per cent to 16.30 last week. The volatility index started to climb after the US Federal Reserve Chairman Ben S. Bernanke recently said the central bank could reduce monetary stimulus if officials see signs of sustained improvement in growth.
Similarly, VStoxx Index, a gauge of Euro Stoxx 50 Index options, closed at 19.60, near its month high.
Volatility index captures the expected movement — upside or downside — of the underlying index over the near term.
According to studies, the equity volatility gauge moves in the opposite direction to the S&P 500 about 80 per cent of the time.
India VIX or volatility index on the NSE also captures similar sentiment. The fear gauge, which has been remaining firm above 16 during most of May, touched 19.36 on May 23. The last time the India VIX hit the 19-mark was on September 24, 2012. Though the index moderated a bit to close at 16.99 on Friday, this clearly reflects the underlying fear among traders.
The India VIX has remained firm at a time when the Nifty is swirling around the psychologically important 6,000 level.
According to NSE, India VIX is a volatility index based on the Nifty 50 Index option prices. From the best bid-ask prices of Nifty 50 options, a volatility figure (per cent) is calculated which indicates the expected market volatility over the next 30 calendar days.
The India VIX hit an all-time low of 8.7 in May 2008, during intra-day trading. On a closing day basis, the low was 13.07, recorded on March 7. The fear gauge touched a high of 92.53 on November 14, 2008, when the bear market was at its peak.
Rising volatility indices are not a good sign for India. The current rally, which has mainly been fuelled by foreign funds, will taper-off if global fund houses adopt risk-off strategies. Already there are some signs to that effect, as the rupee has been depreciating against the greenback.
Apart from the volatility index, investors and traders can also observe the following developments:
The timing of the arrival of monsoon on the coast of Kerala
Markit Economics will unveil HSBC India Manufacturing PMI for May on Monday. The purchase managers’ index gauges the business activity of India’s factories.
Rupee movement
Reliance Industries will hold its annual shareholder meeting on June 6.
Global cues from the US and Japan.