by Vicki Schmelzer

NEW YORK, Jan 10 (MNI) – In the new trading year, a number of
well-regarded risk sentiment indices have begun to flash “risk-on.”

So far however, global investors, still worried about the eurozone
crisis and the prospects of peripheral funding problems in the first
quarter, have been largely content to fence sit.

Each Thursday, the St. Louis Fed releases its financial stress
index, which takes into consideration eighteen variables, including the
effective federal funds rate (2-year/10-year and 30-year Treasury
yields), the yield curve, corporate versus Treasury spread, three-month
LIBOR and TED spreads, 10-year nominal Treasury yields versus 10-year
TIPS, the Merrill Lynch Bond Market index and the CBOE’s VIX, to name a

The higher the FSI index, the higher the stress in the market.

In early 2007, the STLFSI was mostly on a -1 “handle (lowest level
seen at -1.234 on February 23, 2007), but as the year wore on, the index
edged into positive territory, topping out at +0.979 December 14.

Well before the subprime mortgage crisis peaked and the S&P 500 put
in its crisis low of 666.79 March 6, 2009, the STLFSI topped out at
+5.359 on October 17, 2008. The index was at +3.915 on March 6, 2009 and
ended that year at +0.308.

The most recent STLFSI reading, released January 5 with data as per
December 30, was +0.766, down from the +1.002 seen the week ending
November 25.

The CBOE’s volatility index or VIX, watched closely by the market,
edged ever closer to the sub-20/risk friendly territory earlier Tuesday.

The VIX held at 20.46 in afternoon action, after trading in a
20.05 to 20.47 range.

After topping out at a 2011 high of 48.00 August 8, the index saw a
range of 20.34 (December 22) to 46.88 (October 4 – day the S&P 500
posted a 2011 low).

The VIX last traded below the key 20 level in late July 2011,
before eurozone peripheral happenings began to have a negative impact on
risk on a near-daily basis.

BoA/Merrill Lynch strategists pointed out that BoA/Merrill’s GFSI
(Global Financial Stress Index, introduced in November 2010, measures
risk, hedging demand and investment risk appetite – various gauges for
all), which had been in “risk-off” territory since July 12, 2011, began
to move into “risk-on” territory January 4.

While the GFSI is flashing “risk on,” the strategists warned that
“it is prudent to be prepared, in case markets re-couple with Europe”
going forward.

The GFSI has retraced to 0.77 from a peak of 1.31 October 4, the
strategists noted.

“The decline has been driven by market-based risks that appear to
have decoupled from sovereign stresses that continue to haunt the
eurozone,” they said.

UBS’s risk index also has moved back into risk-seeking territory.

The risk index held at -0.36 Tuesday, compared to -0.14 December 31
and 1.81 October 4, 2011, noted Manuel Oliveri, strategist at UBS.

The improvement in risk has been driven largely by “falling equity
volatility,” he said.

UBS advised against “buying risk around current levels, as we
believe that equity volatility may be misleading as a proxy for broader
market risk up ahead,” Oliveri said.

As for the move down in the VIX, he maintained that “with equity
volatility lower, sentiment better, but stocks broadly flat, the key
message is that the soft VIX is simply a sign of lower demand for

That option “put to call” ratios are lower supports this notion,
Oliveri said.

“If so, this suggests that U.S. equity markets in particular are
under-pricing current market risks,” he said.

The S&P 500 was trading up 0.80% at 1290.97 Tuesday, after holding
in a 1280.77 to 1296.48 range.

The index has been trading above its 200-day moving average
(1258.28 currently) since the start of 2012, which has been taken as a
bullish sign.

Earlier, the S&P 500 vaulted the October 27 peak at 1292.66. While
a close above the October highs would be deemed promising, traders will
want to see the index trade above the psychological 1300 level on a
sustained basis before entering into new stock longs more aggressively.

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[TOPICS: M$$FX$,M$U$$$,M$X$$$,M$$FI$,MAUDS$]