April 15, 2003: 8:48 AM EDT
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - Ever hear the one about how markets climb a wall of worry?
Yeah, it's a bit of a cliche, but it gets at an important point: Oftentimes the best moves in the market occur when Wall Street reckons things are looking bleak. When the prevailing outlook is pessimistic, even incrementally good news can send the market higher. Bad news, because it merely confirms what everyone already thinks, has little effect.
But suddenly the market seems to be showing a worrisome lack of worry. Emboldened by the swiftness of the fall of Saddam Hussein's regime in Iraq, there's a sense that all other obstacles will fall quickly. Signs that the economy is snapping back from a tough February and March are being seen as a token of incipient recovery.
It's the sort of situation that suggests the market's rally off its mid-March lows could run into some sort of head wind.
Probably the best way to track what's going on is by looking at the Chicago Board Options Exchange's Volatility Index, better known simply as the Vix. The Vix measures not actual volatility, but what's called implied volatility of the S&P 100 index. Implied volatility measures how volatile investors in the options arena think the market is going to be, and has become a good proxy for how worried investors are.
When the Vix is running high, it's often a good sign that the market has become overly worried, and due for a snapback. When the Dow Jones industrial average hit its low for the year March 12, for instance, the Vix hit 41 -- its highest level since October's deep selloff.
As investors' worry subsided, and stocks rallied, the Vix slipped. Monday it finished the day at 26.47, it's lowest level since June 10. It's also, points out Mizuho Securities USA futures division director Phil Ruffat, fallen below its one-, three- and five-year moving averages. Whenever that's happened in the past, he says, the Vix has tended to rise significantly within the next 90 days -- a move that is consistent with a sharp drop in stocks.
It could be the economy, it could be the growing tension between the United States and Syria, it could be something we haven't even thought of yet. But the lower the Vix goes, the more vulnerable the market is to getting hit by some fresh worry.
But Doug Kass, a bear-turned-bull who runs the hedge fund Seabreeze Partners, has a different take on what's going on with the Vix. He believes that investors are more blase than bullish, believing that the market is going to be in a directionless muddle. As a result, the demand for options -- bets that stocks will go up or down -- has fallen. This has made options cheaper and, since it is derived from options prices, lowered the level of the Vix.
It's all a sign, Kass thinks, of how many investors are still sidelined. As they gradually realize that the rally is for real, and come back onto the field, stocks will go higher still. The same thing happened early 1998, he says, when coming off the Asian financial crisis investors were dubious whether the market could make any headway for the year. The Vix fell to 20, and the market put on a rally that lasted months.
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