Stocks
Volatility index dips to all-time low; the chances of a correction become higher

The NSE volatility index or India VIX slumped to its all-time low yesterday, indicating a large downside risk to the market

In a major indication that a significant market correction is imminent, the National Stock Exchange (NSE) volatility index ended at 16.15 yesterday - the lowest on a closing basis since its launch. The index also hit an intraday low of 15.13, a level it has not reached for well over a year now.

The NSE volatility index, known as India VIX, has been falling for some time now and is quoting at record lows. Experts believe that this reduced volatility could now be bottoming out, coinciding with an expected fall in the market. But can higher volatility not mean further rise in prices? In a bull market, rising volatility from extreme low levels is usually not associated with further rise but a decline.

Moneylife had first written about low volatility presaging a market decline on 7 August (see: http://demo.moneylife.in/article/72/8186.html) but the market has remained at the same level.

India VIX is a volatility index based on the Nifty 50 index option prices. From the best bid/ask prices of near term Nifty 50 options contracts, a volatility figure (%) is calculated, which indicates the expected market volatility over the next 30 calendar days. The index is a measure of the market's expectation of volatility over the near term.

Typically, lower volatility levels are a sign of investor complacency or high confidence levels among investors. Rising volatility implies greater degree of fear among investors. So while a low volatility index is a positive for the market, the perception this time around is that it is now bottoming out and won't sustain at these levels for long.

Vikas Khemani, executive VP and head - institutional equities at Edelweiss Capital believes that the time is ripe for a correction. "There seems to be some sort of complacency that there is very little risk in the market. Volatility has to go up from here. Typically, volatility always goes up when the market falls."

Ajay Parmar, head - institutional equities, Emkay Global Financial Services disagrees. He does not feel that low volatility is a sign of coming decline. "We are in a phase of consolidation now. The index is moving nowhere, which is being reflected in the volatility. I don't expect any big surprise on either side. From this level, I would expect volatility to move up a notch," he said.

Alex Mathews, head-research, Geojit BNP Paribas, feels it is too early to comment whether the VIX is bottoming out. "We have previous experience that VIX remains at lower levels for a long period during a secular bull market. During these periods we may not be able to see a sharp rally in the index, but it will remain in a tight range and selected stocks - especially small- and mid-cap - will show more strength."

Apart from the low volatility, other macro-level indicators also seem to suggest that a correction is on the cards. As Moneylife had reported earlier (see: http://www.moneylife.in/article/8496.html), the operating performance of BSE 100 companies in the June quarter was a disappointment for the markets. With a paltry 1% growth in operating profits, the performance of India Inc was contrary to the market's expectations.

Another indication of the impending fall in the markets is the huge open interest in equity futures at the NSE. The ratio of open interest in stock futures to Nifty futures at the exchange recently crossed 70:30, a level reminiscent of the pre- January 2008 period. The market had crashed in mid-January.

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COMMENTS

Er SS Hari

7 years ago

since now VIX has risen it has to come low for sustaining market upmove or market has to come down to respect VIX levels.VIX is inverse indicator but for market moves has to be read in conjuction with PCR values.too much rise in too small time that also in targeted shares in short term these nifty levels may not sustain

msbhash

7 years ago

This is not the correct reflection of the market.Heavy weights did not go up The real value of Nifty could have been around 5950. but for the big Daddy-Reliance- which did not perform well in the market. This scrip did not particpate in the present rally!!
This is the only scrip which can go up ;when there is an upmove in the reliance then only the market can enter a bull phase..For the past many days this has not happened hence there can be a reasonable corrrection and the nifty may go down to 5350 level to enable the big players to enter into this scrip who are waiting on sidelines.

ErSS Hari

7 years ago

additional comments:as IV is low hedging cost is very low a hedged market never falls.stock futures OI is high because of retail is also participating in futures.FIIs has invested so much they will not leave unless a further spike is there.money sitting on sidelines is not being given a chance.every small dip is picked up.only worry is money has started flowing to small caps and indian operators may spoil the show.JhunJhun always say up Shankar sharma Amreesh Bagga always say down.Reading VIX in isolation is a lagging indicator.more serious discussion on the subject is required.

ErSS Hari

7 years ago

only vix dot blogspot dot com does lot of study on volatility.seems big players want to keep indices stagnant and money is flowing to small caps forspeculative games..since big players are fully hedged they are not bothered about vix.. vix should go up.as market goes up fear goes up so the vix level indicating reversals at extreme levels.as now analysts used VIX and PCR levels to gauge market these tools are now made retundant by new generation strategists.pair long short strategy is being deployed money flowing to selected stocks and weak stocks hammered more.smartmoney is ready for a spike in market and then exit with basket selling.it is now understood euphoria due to retail participation will not come neithe LIC like cushions during emergency will work.reliance is sidelined tata motors is being boosted though nano is catching fir as shown on tv channels.market fire may come within two months exactly no body can predict..

REPLY

Er SS Hari

In Reply to ErSS Hari 7 years ago

There is practical discussion on VIX at invested central dot com few days back.Also at investopedia dot com by Dr.Johan Suma.Their crux is it is inverse indicator to price and any divergence therein next is caution note.Yes at extreme low level and extreme high level it gives reversal sign.Practical tip is if price is down but VIX up big upside move expected as insiders build up long call option positions by paying high premium.

Govt may allot some coal blocks in 'no-go' areas for UMPPs

New Delhi: The government today said that some of the coal blocks lying in the "no-go" areas, which could not be used for mining, may be shifted to the go-areas, a move to expedite clearance for ultra mega power projects (UMPPs), reports PTI.

Ministry of environment and forests has classified certain coal blocks as no-go areas i.e. the areas, where there is a dense cover of forests and mining cannot be done.

"We are working on them...some (coal blocks) could be accommodated through boundary adjustment... some could go from no-go to go areas," power secretary P Uma Shankar told reporters here.

"We will keep environment concerns in mind and manage both (capacity addition and environment) for the development of the power sector," Mr Shankar said.

The ministry of power has further extended the date of submission of initials bids for the Chhattisgarh ultra mega power project, as the coal mines allotted for the project fall under the no-go area and await environment clearance.

Coal block allocated for a similar project in Orissa is also awaiting environment clearance.

The power ministry plans to add a substantial amount of electricity generation capacity from these projects in the Twelfth Five Year Plan Period (2012-17).

Delay in the bidding process of these projects could derail the ministry's mega capacity addition plans.

He added, not only power projects, captive projects for steel...they could also have difficulty.

As many as 18 coal blocks are awaiting environment clearance.

Meanwhile, coal minister Sriprakash Jaiswal had earlier said that the companies, which have made significant investments in blocks, which were declared in no-go areas could be given priority.

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A looming crisis

China’s property market is in a very big bubble that may last until the government increases interest rates and introduces a real-estate tax to curb prices.

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