Did the Bull Market Just End in Cyprus?
The Cypriot agenda (there must be a Robert Ludlum novel by that name) continued to weigh on markets today, with the S&P 500 falling 0.2%. The narrower, price-weighted Dow Jones Industrial Average managed to squeak into the black with a gain of three-hundredths of a percentage point.
On the heels of a sizable 18% pop yesterday, the VIX , Wall Street's fear gauge, rose another 8% today, to close at 14.39. At that level, the index is still far below its long-term average, but at least we're in a more credible range than we were last week. That it should even require a (small-scale) eurozone flare-up to rise to its present level says something about the degree to which investors have been lulled by the stock market rally into expecting quiet, steady price gains. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)
Shades of 2011 and 2012
Here's a look at the S&P 500 (blue line, left axis) and the VIX (red line, right axis) since the start of 2011:
In each of the two previous years, the stock market's positive momentum was disrupted by macroeconomic events (including the U.S. debt ceiling debacle in 2011 and the eurozone crisis) and suffered significant pullbacks off its highs, before resuming its upward trajectory. Does this mean we're now experiencing the start of the same pattern, triggered by Cyprus and international lenders' shambolic handling of the situation?
Not necessarily. One thing to note is the declining magnitude of the associated "pops" in the VIX -- we've not come close to the levels achieved in the second half of 2011. This suggests that professional investors' risk aversion has declined markedly since then. In the U.S., that is largely -- though not entirely -- justified by improving corporate and macroeconomic fundamentals (despite a stagnant political class). Cyprus doesn't look sufficient to alter that shift.
And if stocks do suffer a correction? If you are a net buyer of stocks, this is no cause for concern; in fact, stocks don't look particularly cheap right now, so the value-focused investor might welcome the opportunity to put money to work at discounted prices.
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The article Did the Bull Market Just End in Cyprus? originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA. has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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