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What to watch: Fear gauge rises on cliff's edge

7:59 PM, Dec 27, 2012   |    comments
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Adam Shell, USA TODAY

With just three days until the fiscal cliff deadline and a deal still elusive, a closely watched Wall Street gauge that measures the fear level of investors suggests Wall Street isn't frightened silly by the political impasse in Washington - at least not yet.

Sure, the "fear gauge," known as the VIX, spiked above 20 on Thursday to its highest since late July and up 30% since Dec. 18. But it's still below 48, the level it hit in August 2011 when a political fight over raising the nation's debt ceiling resulted in a ratings agency stripping the U.S. of its triple-A credit rating for the first time. The downgrade resulted in the Dow Jones industrial average plunging 635 points in a single session.

The VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility index, which measures the market's expectation of stock volatility over the next 30-day period. High VIX readings mean investors see a major risk the market will move sharply, either up or down.

The low VIX reading now is telling us Wall Street expects a fiscal cliff deal, if not by the Dec. 31 deadline, then sometime early in January, says John Stoltzfus, chief market strategist at Oppenheimer. In short, the market is not pricing in big downside that would occur if cliff negotiations drag on far longer than expected.

"What the VIX is saying is we're going to get a deal of some sort early enough in January to permit the economy to keep growing, set about a tax regimen that is digestible and cuts to spending that are livable," Stoltzfus says.

USA TODAY

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