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Investing Specialists

Morningstar Volatility Report for April 30, 2010

Uncertainty 'returns.'

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Introduction
The Morningstar approach to options is focused on using company and economic fundamentals to interpret and estimate the value of the uncertainty around market prices, as reflected in implied volatility in the options market.

Is the Party Over?
This week, sovereign debt downgrades for both Greece and Portugal, as well as talk of a downgrade to Mediterranean neighbor Spain, sent equity markets across the world tumbling and implied volatilities soaring, despite encouraging earnings news from U.S. firms. If there was a publicly traded market for words, the stock of 'contagion' would have been on a bull run this week. Jittery equity investors were sure that the sky was falling, and that little Greece's problems would somehow pull down all of Europe. Adding to the uncertainty this week was the revelation that the Justice Department is launching a criminal probe into  Goldman Sachs(GS) trading operations.

The Numbers
The week started quietly enough. Good earnings results from U.S. bellwether  Caterpillar (CAT) and appliance maker  Whirlpool (WHR) along with positive comments by company managers about a robust return to economic activity convinced the market that the economic recovery was proceeding apace; the VIX spent much of the day in its 17% comfort zone. But the halcyon moments were not to last. 

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Erik Kobayashi-Solomon does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.