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S&P 500 Valuation vs VIX Shows Concern Lacking: Chart of the Day

Investors are becoming overly content about the prospects for stocks after more than four years of gains, according to David Bianco, chief U.S. equity strategist at Deutsche Bank AG.

The CHART OF THE DAY shows how Bianco reached his conclusion: by comparing the price-earnings ratio for the Standard & Poor’s 500 Index with this quarter’s average close for the Chicago Board Options Exchange Volatility Index. The latter gauge, known as the VIX, is based on S&P 500 options.

Bianco’s P/E-VIX ratio closed yesterday at 1.20. At that level, a lack of concern that share prices may fall starts to supplant “realistic and disciplined” investing, he wrote in an Aug. 9 report.

“This complacency signal may pertain more to the derivatives market than the equity market,” he wrote. This quarter’s closing VIX average as of yesterday was 13.59, just above the first-quarter figure of 13.53. The latter reading was the lowest since 2007, when a five-year bull market came to an end, according to data compiled by Bloomberg.

While stocks have room to extend their advance since March 2009, increased volatility is likely to accompany any further gains, he wrote. This would allow stocks to rise relative to earnings without sending another warning sign, the New York-based strategist wrote.

Bianco expects the index to end next year at 1,850, which is 9.2 percent higher than yesterday’s close. His projection for the end of this year is 1,675, in line with the average among 17 strategists in a Bloomberg survey.

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