What are the ‘Black Swans’ Telling Us About the State of the Markets?

846
0

Here’s the fact: the Chicago Board of Options Exchange’s SKEW Index, aka the “Black Swan” Index, just hit an all-time high. 

Some investors are anxious or even scared by this, but some believe this metric can be approach with cautious optimism.

In his recent Marketwatch opinion, Mark Hulbert illustrated the SKEW index as a measurement of the gap between those participating in the more-bullish mainstream consensus and those who he aptly labels as “permabears.”

He posits that the recent peak of the “Black Swan” index indicates that the mainstream is becoming more bullish and not that permabears are becoming bearier. He also notes that there has been “no notable increase” of investors believing the stock market may soon crash.

More than anything, Hulbert reinforces that the “black swan” index is truly measuring the disagreement between the two groups and cautions extrapolating additional conditions beyond that point.

And while he does actively caution against the chicken-littling of the SKEW index, he also closes his opinion with a welcome to contrarians. 

What is the Black Swan Index?

In finance, a so-called “black swan” is defined as an “unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.” 

They’re rare, they can be hugely impactful and they aren’t the kind of events that anyone plans for. 9/11 is one examples, as if the Covid pandemic. 

The SKEW Black Swan Index itself is a measure of potential risk in financial markets as a proxy for investor sentiment and volatility. It does this by measuring perceived tail-risk in the S&P 500, which is the expected change in stock prices as a result of a black swan event. Chances of it happening are low, but if it does the impact could be massive.

Previous articleEstate Planning With Adult Dependents
Next articleThe Pandemic is Fueling a Growing Wealth Gap

LEAVE A REPLY

Please enter your comment!
Please enter your name here