Thanks to Bob "I don't get out of bed unless it's over 20" Pisani's daily diatribes about VIX (the so-called 'fear' index), we are supposed to rest assured that all is well in the ever-decreasing horizon world of equity markets. However, while VIX measures the expectations of 'normal' day to day moves in stocks, it does not offer any insight into market participants' perspectives on tail risks (or 'the big one'). CBOE's SKEW index does just that, based on the pricing differences between normal and fat-tail risk pricing in the options market, it provides a measure of the market's belief in extreme events... and for only the 4th time in history, it's flashing a big red warning signal of volatility ahead.
The last 3 times this happened... markets went a little crazy...
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In 24 years of history, SKEW has been above 140 only 4 times (including the current)... the last 3 times were...
- 06/21/1990 - S&L Crisis (Stocks dropped 18% in next 3 months and the US entered recession)
- 10/16/1998 - Russian Default and LTCM (Stocks soared 22% in the next 3 months and the dot-com bubble was born)
- 03/16/2006 - Housing Bubble peak (Stock dropped 6% in next 3 months and the 'great recession' started within a year)
And now?
- 12/20/2013... Taper...
Chart: Bloomberg