The plunge on the Japanese stock market last week did not effect the VIX index. Why is the American stock market almost immune to these kinds of movements elsewhere?
The rapid rise of the Japanese market has suddenly come to a halt. The Nikkei 225 has almost doubled since 2011, driven by a weaker yen and better export prospects for Japanese companies.
Last week a 7.3% drop shocked investors. If we put this decline into perspective, it is still a small percentage of the huge gains achieved earlier this year. But nonetheless, 7% in one trading session isn't a sign of confidence and can be seen as a serious warning. It means too many people want to exit the room at the same time. The yen/Nikkei trade is getting crowded and this is the first sign.
the weaker yen supports the Nikkei 225 rally
The volatility in the Japanese index spiked during the heavy sell-off. The VXJ (Nikkei 225 volatility index) went up from 27 to 44 (which seems to me rather contained with such a huge movement) but the American stock markets hardly reacted. The broadly-watched S&P 500 index lost only 5 points that day, or 0.3%! Initially the VIX, the volatility index of the S&P 500 went up a bit, but that did not last and at the moment the VIX is still hovering around 13-14.
Why is the VIX not responding?
So it looks like the S&P 500 is more or less immune for mini-crashes in other indexes or asset classes. The reason for this immunity is that the high-quality dividend stocks have evolved to the category of the safe havens. during the financial crisis, several asset classes have been regarded as a safe investment. But one after the other they have proven not to: Swiss and Norwegian currencies have been undermined by their own central banks, gold plunged one month ago and hardly recovered and bonds are too expensive and hardly yielding.
As I described in an earlier article back in April about the TINA-effect, dividend stocks are the place to be at the moment. Whenever another asset class is collapsing, like the Nikkei did last week, the money flows to the dollar and to the American stock market.
The VIX-index is based on the S&P 500 index option classes. The attractiveness of the American stocks is therefore responsible for the fact that the VIX index is not representative of the anxiety in the financial markets. As long as these 'superstocks' are seen as a safe haven, the VIX is not worth buying for the longer term.
The VIX-index can be traded through a variety of ETFs and ETNs like VXX, IVO, and VXZ. As long as high-quality stocks have little or no competition from other asset classes, the VIX-index does not represent the sentiment in the financial markets. It is therefore not worth setting up a long position.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.