Europe’s sovereign debt crisis will still hang over global markets this week, but on Wall Street investors will not be afraid to bet on stocks.
Wall Street has shown its ability to hold onto gains, or quickly recover from losses last week despite Europe’s debt woes, suggesting that investors are confident of a sustained rally.
“When things don’t fall apart on bad news, you know that the market is no longer vulnerable. The overall sentiment is pretty solid,” said Randy Frederick, director of trading and derivatives at Schwab Center for Financial Research in Austin, Texas.
The outstanding put-to-call ratio on index options, heavily focused on the S&P 500 benchmark, dropped from 1.32 two weeks ago to 1.29 last week, showing bullish signs for the week ahead.
The ratio, which is always greater than 1, is the primary hedging vehicle for institutional investors. The ratio rises with a market rally as the possibility of a pullback also increases.
“The ability (to not fall apart) is helping investors remain upbeat on short-term prospects for stocks. We may not see this continue until the end of January next year, but the month of December certainly looks encouraging.”
The CBOE Volatility Index or VIX, Wall Street’s so-called fear gauge, fell despite a decline in stocks earlier on Friday as traders saw fewer reasons to buy protection.
The index, which usually moves inverse to the S&P 500 benchmark, strayed from the relationship and closed at its lowest since April.
A fortnight ago, the S&P 500 was down 3 per cent from 5 November. But the index recovered last week as fears were countered by a spate of healthy economic data and an upbeat outlook on consumer spending.