Morningstar Volatility Report: Uncertainty Eases Slightly
Our take on uncertainty levels in health care, manufacturing, financial services, and more.
Our take on uncertainty levels in health care, manufacturing, financial services, and more.
This the second weekly report discussing the Morningstar Volatility Index (MVI) and changes in implied volatility across equity markets during the trading week. The MVI is a measure of the implied volatility of the average option on individual stocks in the U.S. option market. The implied volatility of an option is a measure of both the upside and downside uncertainty about the future of the company on which the option is written. So, changes in implied volatility can be used to understand uncertainty about the future of stock prices, and how that future uncertainty reacts to news flow.
For more information about the MVI and Morningstar's option research methodology, I'd encourage you to download the free Morningstar Guide to Option Investing.
Broad Market Uncertainty
Uncertainty in U.S. equity markets rose through a high of 82.5% on Tuesday, then eased for the rest of the week to close down 2.5% at 78.5%.
Sector Trends
Across sectors, uncertainty eased broadly. Uncertainty in the health-care space spiked on Tuesday to 63% implied volatility, party attributable to uncertainty about the impact of swine flu on the shares of some health-care firms, and partly based on a bearish rumor that caused the share price of Dendreon to plummet to a trading halt. Uncertainty then eased to close the week at 50% implied volatility as implications of swine flu became more understood and the Dendreon rumor proved false.
Uncertainty remained at week-ago levels in manufacturing and consumer services, resisting the broad easing trend. The sustained elevation of uncertainty in these sectors was likely driven by uncertainty about the Chrysler bankruptcy and the impact on the shares of auto manufacturing supply-chain companies and automobile retailers.
Uncertainty eased slightly in financial services but remained at elevated week-earlier levels, with implied volatility down from 124% to 121%. Implied volatility will likely remain high pending the results of government stress tests of the capital bases of large banks, the results of which will be released on Thursday.
Uncertainty remained flat across the quality spectrum, with value, core, and growth stocks all easing slightly.
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