Bloomberg
New York

Investors seeking a silver lining on bad days for stocks aren’t finding it in the Federal Reserve.
The Chicago Board Options Exchange Volatility Index jumped the most since August’s sell-off on Tuesday as companies from energy to autos slumped. The ratio of puts to calls on the Standard & Poor’s 500 Index has surged 12% over the past week, signalling investor appetite for protection against losses. That’s the most pronounced five-day jump since 2009, with the biggest increase coming the day after the Fed’s rate decision last week.
The Fed’s stimulus policy, which has helped to support the bull market for more than six years, has only served to confuse investors of late. Equities have slid since the central bank’s decision to keep rates unchanged amid concern over global growth and financial-market turmoil. With pessimism surrounding news on Volkswagen, the health-care industry and commodities prices, traders are finding few places to run for shelter.
“The Fed confused its message a bit,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co in Milwaukee. “You can try to work your way through a cloudy day and remain upbeat, but once it starts storming, it makes you run for cover.”
The S&P 500 lost 1.2% to 1,942.74 in New York, its third loss in four days. The measure of market turbulence known as the VIX jumped 11% to 22.44, its biggest increase since Aug. 24. The volatility gauge has closed above 20 for 22 straight sessions, the longest stretch since June 2012. While on the surface it was Volkswagen’s widening scandal and the renewed rout in commodities that helped spark Tuesday’s selloff, looming over the market continues to be the Fed’s decision last week to keep rates pinned near zero.
“There’s a general view of skepticism and volatility that shakes people up,” said Brent Schutte, senior investment strategist at BMO Global Asset Management in Chicago, which manages $250bn. “Right now when there’s uncertainty, people seem to hit the sell button. Sometimes the micro can fill in for the macro.”
The Fed has underpinned equities as the S&P 500 jumped more than 200% from its low in 2009 through May, with three rounds of monetary stimulus helping to power the bull market. The benchmark index reached new highs despite flashpoints in Greece and the Ukraine, crises over eurozone borrowing, the US debt ceiling and Ebola. All of these events turned out to be buying opportunities.
Buying the dip has broken down lately, as the S&P 500 dropped 10% over four days last month for its first correction since 2011 amid a global sell-off. US equities rallied into last week’s Fed announcement, only to tumble 2.6% through Tuesday.
While the Fed maintained stimulus on Thursday, comments from Chair Janet Yellen signalled the central bank is concerned that slowing growth and market turmoil may pose a threat to the American economy. Fed officials have since been claiming the US economy is strong enough for a rate hike this year.
“The Fed overhang is a dark cloud over our heads right now that we won’t get past until they actually move,” said Michael Mullaney, who oversees $11.5bn as the Boston-based chief investment officer at Fiduciary Trust Co The market is “getting pushed around now significantly by any hint of a negative price action, especially to the downside,” he said.
Risk aversion has led investors to pile money into an exchange-traded note that increases in value as volatility climbs. The iPath S&P 500 VIX Short-Term Futures ETN, known by its ticker VXX, has absorbed $381mn over the past week, the most since March 2013. The instrument is also trading at a record 3.2% premium over its underlying asset value.
Of the 10 options on the SPDR S&P 500 ETF with the highest ownership, nine are puts. October contracts that pay off should the fund lose 1.6% and September 30 puts betting on a 4.1% decline had the highest open interest among bearish contracts.
“There are a lot of out-of-the-money put buyers in individual stocks,” Jim Smith, an options strategist at OTR Global Trading in Purchase, New York, said by phone. “It feels like it’s a defensive hedging move rather than initiating a short position.”
Amid all the nervousness, some investors are still looking at the US economy as a pillar of strength. US unemployment has fallen to the lowest level in seven years, auto sales are booming and rising retail sales signal that consumers may be looking past recent volatility in financial markets.
Upcoming third-quarter earnings reports may show a less rosy picture. Corporate profits are forecast to contract 6.5%, its biggest loss since the third quarter of 2009, according to data compiled by Bloomberg. Earnings will fall by 1% in the fourth quarter before returning to positive territory in 2016, the data show.
“We’re in a gap before earnings next month, so there’s not a lot of data out there,” said Giri Cherukuri, head trader and portfolio manager at Oakbrook Investments in Lisle, Illinois. The firm oversees about $2bn. “There’s more speculation driving things. Uncertainty about what the Fed is doing is imposing volatil