Avoid Market Swings by Following the Fear

Like those ubiquitous time and temperature messages seen on bank marquees, signs everywhere flash news of the latest swings in the stock market. But if you think you've been seeing something different on those signs in recent months, you're right. Prices are jumping around a bit more these days. After slumbering since 2003, volatility has returned to the stock market—and to the debt markets as well. Chalk up the renewed turbulence to the uncertain times in which we live.

At Thrivent Financial for Lutherans, Mark Simenstad and David Francis closely monitor the ups and downs of the securities markets. They say 2007 will go down as one of the more memorable years in the annals of securities market volatility. Simenstad heads fixed-income investments for Thrivent from its corporate headquarters in downtown Minneapolis. Francis oversees Thrivent's equity investments from its Wisconsin command post, 250 miles to the east in Appleton. While the Dow Jones Industrial Average stock index is the most omnipresent reminder of market rises and falls, Simenstad and Francis try to frame a better picture of this year's rocking and rolling and where things will head from here by focusing on two less familiar indexes.

There are many measures of market volatility, but the VIX gets quoted more often than the others. That's probably because it has come to be widely known as "the fear index."

Mercurial Movement

Francis tracks the Chicago Board Options Exchange Volatility Index, popularly known as the VIX. This indicator of stock market volatility was formally introduced in 1993, but got its start in 1986. Simenstad watches the Merrill Options Volatility Estimate, or MOVE Index, dreamed up by Merrill Lynch to chart swings in the debt market.

"The VIX is kind of the mother of all volatility measures," Francis says. The options board produces the VIX by weighting a blend of prices for a range of options from companies in the Standard & Poor's 500 index. The VIX is designed to reflect the consensus of investors' expectations of stock market volatility over the next 30 days. The board calculates the VIX in real time and expresses it as a single number. The higher the number, the greater the volatility.

From 1992 until 1996, the VIX fluctuated between 10 and 20, spending long stretches at the bottom end of that range. It began climbing in 1998 and peaked at 49.35 on September 21, 2001, 10 days after the September 11 terrorist attacks. It's stayed low since then except for a spike to about 50 in 2002.

But the VIX is getting restless again. Last March, it spiked at 22. In mid-August, it peaked again, at 28. Early in September, after some wind-whipped days in the stock market, it was back above 26. At the start of October, it was down to 17.50.

Measuring Fear

Francis thinks the VIX, unusually low since 2003, is returning to a higher and more typical range. "We are in a period where, on average, stocks will be more volatile than they have been for the last four years," he projects. "I think it's a pretty safe bet to say that volatility is going to be higher than it's been for the last couple of years."