Trader’s Narrative

The first time we looked at the Credit Suisse Fear Barometer, it didn’t look like it had anything useful to offer. But using it in combination with its competitor, the VIX index, it may yield surprising insight into options sentiment and the stock market.

The VIX has declined from its stratospheric highs to reach close to its long term average of 20. That may suggest that there is little fear in the market. But that isn’t really accurate because right now traders are willing to pay more for put options than for (equivalent) call options. We can tell that because the CSFB is higher.

The last time we had a CS Fear Barometer rising while the CBOE volatility index was falling was in early May 2008 (shown above) - just before the S&P 500 rolled over into another waterfall decline.

Source: Battle Of The Fear Indexes

That is just one instance but the others also provide the same general idea. The S&P 500 has a very tough time on average, going up when the VIX has fallen and the CSFB has gone up.

So it seems the ugly duckling of an indicator has suddenly become a swan. When paired with the VIX, the CSFB seems to unfold even more meaning for the stock market.

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This weekend’s Barron’s introduced a new measure of “fear” in the stock market developed by a team from Credit Suisse’s equity-derivatives trading and strategy desk. It is called the Credit Suisse Fear Barometer (CSFB). A clumsy name for what seems to be a clumsy indicator.

To break it down, they are looking at zero cost collars and measuring the skew between the upside target and the downside protection. So for example, in October 2008 when the S&P 500 was plummeting and the CBOE volatility index was screaming higher (reaching a high of 89%) the Credit Suisse Fear Barometer was around 10%.

This implies that, back then, if you were long the index you could have put on a costless collar at +/-10%. Put into context, this means that there was almost zero fear in the market. Huh? Does that make sense to anyone? All you had to do was have a pulse and watch the market to know it was one of the most turbulent chapters in market sentiment.

The dynamic duo at Credit Suisse have backtested their indicator all the way to 1998 and shown that it has a small range (at least compared to the VIX). The minimum was 10% (as mentioned above) in October 2008 and the maximum was March 2007 when it reached 30%. But March 2007 was a market top (of sorts) in the S&P 500. Again, it makes no sense to say that this was a “fearful” time in the market.

These are just two data points from the series and to analyze it further you need a Bloomberg terminal. But here is a sneak peak courtesy of Jason Goepfert:

Source: Is The New CSFB Fear Index A Bust?

Now I’ll be the first to admit that the VIX is not an ideal sentiment indicator but does the CSFB make any sense as an indicator? Do you see any relationship between either the VIX or the S&P 500 and the CSFB?

Useless sentiment indicators abound out there and they keep being calculated and disseminated like zombies. Looks to me like the CSFB is a prime candidate for the round filing cabinet - even before it arrived! - which is some kind of record. But maybe I’m being too hasty, we’ll give it a few months to see what it says in real time, based on historical performance the bar is set low indeed.

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