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Investing Specialists

Morningstar Volatility Report: Second Week of Easing

We dissect the continued easing of uncertainty in the stock market during the week.

The Morningstar Volatility Index (MVI) monitors changes in uncertainty about the future across the equity markets during the trading week. The MVI is a measure of the implied volatility of the average option on the 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 eased for the second week in a row, falling materially by 8% for the week to an MVI of 73%. Much of this easing came on Friday as the markets absorbed the results of the governmental stress test on large banks, which allowed the market to better gauge the value of banking shares, the impact of their weakness on the economy, and any potential government interference in the sector. 

Sector Trends
The service supersector calmed dramatically, with a 12.5% drop in implied volatility to 83%. Implied volatility of the average financial services company fell to 102% from a close of 122% on the previous Friday, an easing of 16%. The uncertainty subsided throughout the day on Friday, reflecting the relief over the bank stress test results and the lack of further proposals for government intervention in the banking industry. 

Uncertainty remained at week-ago levels of 69% in manufacturing and consumer services, with broad easing across manufacturing offset by a 5% increase in uncertainty about the consumer goods sector, which increased to 110% implied volatility. 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.

The information super sector showed slight easing of uncertainty, with flat uncertainty in computer hardware and easing in other sectors.

Style Box Patterns
Uncertainty eased universally across the quality spectrum, with value, core, and growth stocks all easing slightly to implied volatilities of 101%, 56%, and 53%, respectively.  Uncertainty also eased universally across the size spectrum to 77%, 67%, and 74% for small, medium, and large companies.

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