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Jun 1, 2007 12:00 PM
The Market at Mid-Year
Something funny happened on the road to nirvana. After an unusually extended period of calm, the financial markets began acting like markets again at the end of February 2007. On Feb. 27, the Dow Jones Industrial Average plunged by more than 400 points, its largest drop since the Sept. 11, 2001 attacks (at one time during the day, due to a computer glitch, it was down as much as 550 points.) It didn't take a heck of a lot to make the February fall happen, either. Unconfirmed reports of a government crackdown on speculation in China and a disappointing U.S. economic report were sufficient to send stock investors crowding the exit doors.
Investors may be a bit jittery. But, consistent with the market's ability to shrug off bad news, by mid-April, the major stock market indices returned to pre-Feb. 27 levels. Perhaps the best barometer of market sentiment today is the Chicago Board Options Exchange Volatility Index (VIX). This index reflects a market estimate of future volatility based on S&P 500 option prices. The market's uncertainty has played out in this index as hedge funds and other so-called smart money players hedge their bets (by going long, that is to say purchasing call options on the index) against further volatility. By mid-April, though, the VIX already had returned to the low levels at which it began 2007.
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