Money News ^ | Tuesday, 15 May 2012 08:04 AM | Forrest Jones
Stocks Poised to Plunge 20% This Summer Tuesday, 15 May 2012 08:04 AM By Forrest Jones
The Standard & Poor's 500 broad stock index could fall as much as 20 percent this summer due to present-day fears of upcoming market volatility, according to Citigroup analyst Tom Fitzpatrick.
The Chicago Board Options Exchange Volatility Index (VIX), which gauges expectations for roiling markets, has been on the rise lately thanks to a worsening European debt crisis, a cooling Asian economy and building economic headwinds at home.
"Every bounce off this VIX support line has been followed by an aggressive correction lower in the S&P in the months that followed," Fitzpatrick writes in a note to clients, according to CNBC.
"Such a dynamic IF the trend high for 2012 is already in place would suggest a fall to 1,038 over anything from 5 to 17 months," Fitzpatrick writes.
"At this point in the volatility cycle, we believe each new tremor is incrementally more likely to be the beginning of the next, inevitable shock," MKM Partners derivatives strategist Jim Strugger writes in a note, CNBC adds.
"We think the recent run-up in equity volatility metrics warrants caution even while maintaining the view that the most natural outcome is for the trough phase of the cycle to extend another couple of months."
The Federal Reserve remains quietly sitting on the sidelines and has not ruled out the option of stimulating the economy via monetary easing measures — asset purchases from banks that flood the economy with liquidity — should recovery head south.
"Expect more volatility. We're still seeing this natural risk aversion. We expect any source of bad news to trigger a sell-off, but we're still not in a red-alert area," says Omar Aguilar, chief investment officer of equities for Charles Schwab in San Francisco,
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