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I have been watching you of late and notice you’ve been lazing in the sun before summer is even here. You have become quite relaxed with the markets and more particularly, those of you who trade the USA markets have become cruisy. I have been watching you through the VIX window. “The what window?” you ask.
VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index which calculates the market's expectation of volatility based on a wide range of S&P 500 index call and put options. It is often referred to as the ‘fear gauge’ and a whole vernacular has been developed around this much discussed index such as, ‘when VIX is high it is time to buy’. But, like so much about the markets, much rubbish has been written on the topic.
Take a look at the monthly VIX chart below for a simple explanation:
click chart for more detail
You can see that the index has been at low levels for the last 3 years – below 15; 15 being an index level. Thus the index has been low for the last three years when the markets have generally been trending upwards. For almost the prior decade the index was above 15 – a period when markets moved sideways or trended down for the majority of those years.
In broad terms, when the VIX is high, markets are less appealing and there is a general sense of unease. Conversely, when the index is low, investors are somewhat at ease.
If you are a contrarian you might think that if the VIX is high and there is fear – and market volatility is high, then it’s time to move in the opposite direction of the mob. Right now there are many who would say we do not have reason to be so cool about things and we should expect the index to start rising - that we should become fearful.
They may well be right, but it’s all about timing and it could be some months or more before we see a change.
Watch for a turn up in the index, as it can be a useful tool, but be careful about predicting the when.
Enjoy the ride
Tom Scollon
Chief Analyst
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