Skew index warns of trouble ahead
The Skew index captures the level of unease in markets. It is now approaching its highest reading since its inception.
Despite the hazardous political backdrop, global markets are "remarkably calm", says John Dizard in the FT. Yet many "large, conservative, real-money investors" are seeking out cheap ways of hedging themselves against a market crash.
The Skew index captures the level of unease in markets: it measures the difference between the cost of buying a put option on the S&P 500 which offers protection against a sharp fall and a call option, which does the opposite. It ranges between 100 and 150, and it is now at 140, among the higher readings since the index's inception in 2011. In short, investors in futures are happy "to pay over the mathematical odds for protection against a market decline".
The Skew is not a reliable market timing tool, but it's interesting to note that many investors are not as complacent as stockmarkets, which are hitting new highs, would have you believe. But beware dabbling in speculation, warns Dizard. Synthetic products such as those based on the Skew are "created by commodities dealers and traders, and tend to be ways for the professionals, not you, to make money".
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Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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