Monday, May 18, 2009

Volatility Index Falls To A Level Suggesting "Market Correction is Complete, Back to Business As Usual"

The CBOE Volatility Index closed today at just barely above 30 (30.24), falling almost 3 points from Friday's close of 33.12, and is now more than 50 points below the November highs that were above 80.

According to Yale Professor Ian Ayres at the Freakonomics Blog on December 24, 2008: "When it (the VIX) drops below 30%, it will be a strong indication that the market correction is complete and we’re back to business as usual."

5 Comments:

At 5/18/2009 4:17 PM, Blogger Bill said...

Are you fully long S&P 500 ETFs?

We can only go up from here right?

 
At 5/19/2009 10:35 AM, Blogger BxCapricorn said...

What's funny is that you can look at the graph and make this interpretation, while I can also argue that in August 2008, when the VIX was well under 30, an investor was "safe". Then the credit crunch occurred, Lehman folded, hedge funds received their margin calls and sold off...you get the idea. The market can turn much faster than the VIX can forecast. VIX measures options volatility, or "fear". We may see a market simply bleed down over time, based on lack of earnings, and never spike the VIX simply because the other side of the trade is not there, or market participants see no value in hedging via stocks. They may hedge using bonds, commercial paper, currencies, etc.

 
At 5/19/2009 11:28 AM, Blogger Size said...

The VIX is not a measure of fear. It's the implied volatility of a wide range of strikes. That means that it reflects both puts (fear) and calls (optimism). An increase in optimism may increase volatility but not increase fear, thus an increase in implied volatility is not necessarily an increase in fear.

An increase in the VIX merely reflects an increase in the range (up and down) of possible future stock prices. In other words, the VIX is an uncertainty index, not a fear index.

BXCapricorn is absolutely correct that we may see a slow sell-off to well below March 9th without ever spiking the VIX. However, that won't be because of a lack of demand for options (for which there is pretty constant hedging demand) but rather because the uncertainty is lower.

 
At 5/19/2009 10:21 PM, Anonymous gettingrational said...

Does not volitility invoke fear in the investor because of the risk to future earnings of the security? The speculator is less fearful because volitility provides a faster pace of turnover to the put and call inventory. Am I correct that the investor is more fearful with a higher VIX reading and the speculator is more gleeful because of volitility?

This is fascinating and Prof. Perry's citng of the VIX charts and associated commentaries is new territory for me.

 
At 5/20/2009 9:22 AM, Anonymous Anonymous said...

time for a new chart. VIX below 27.

 

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