Friday, August 17, 2012

VIX Index Falls to Lowest Level Since May 2007


According to Freakonomics blogger and Yale professor Ian Ayres:

"One of the most important but under-reported financial indicators is the
CBOE’s Volatility Index (^VIX), which measures the market’s expectation of future volatility in stock prices (over the next 30 days). (The CBOE has written a nice technical white paper describing how it is calculated, here.) When it drops below 30 percent, it will be a strong indication that the market correction is complete and we’re back to business as usual." 

Often referred to as the "fear index," the VIX represents one measure of the stock market's expectation of volatility over the next 30-day period (Wikipedia). The VIX is a widely used measure of market risk and it is often referred to as the "investor fear gauge" (Investopedia).

The chart above shows that the VIX Index closed today at 13.45, the lowest level since May 2007, more than five years ago, and more than six months before the recession started in December 2007.  Investor fear in the stock market has been consistently subsiding, and market volatility is now back to normal, pre-recession levels.  

31 Comments:

At 8/18/2012 2:14 AM, Blogger PeakTrader said...

Technical analysis is voodoo, although it can be useful.

Some indicators are more reliable than others, e.g. $NYMO (NYSE McClellan Oscillator, daily, 20-day and 50-day MAs, and sentiment indicators).

When enough people learn a technical indicator works, it stops working.

 
At 8/18/2012 4:51 AM, Blogger Charles Platt said...

Could be a cynicism index more than a fear index, at this point. Many investors cynically believing that since the market is being, er, stabilized artificially, turbulence is no longer an option.

 
At 8/18/2012 6:56 AM, Blogger sykes.1 said...

Well, the Purchasing Managers Index has been trending down for over a year and has been negative for the last few months.

So, it appears that we are ready to fall off the cliff yet again. The cycle is a little early this time.

 
At 8/18/2012 7:15 AM, Blogger Jon Murphy said...

Well, the Purchasing Managers Index has been trending down for over a year and has been negative for the last few months.

The PMI is a diffusion Index. The rate of change doesn't provide any useful information. Rather, the actual Index number is what really matters. On that front, the PMI is not signalling an immediate recession: the reading for the Index the last few months has been virtually flat (well within the margin of error established by the ISM, the Index's creators). It is also important to remember the Index is a Leading Indicator: the trend it is projecting now is slower economic growth in 2Q/3Q 2013, not what is going on now.

 
At 8/18/2012 9:02 AM, Blogger Methinks said...

It is often and incorrectly referred to as the "fear index". It is more accurate to call it the "uncertainty index". The VIX was elevated during the dot com boom of the late '90's when the S&P 500 was rocketing up 28% for the year.

Investor fear in the stock market has been consistently subsiding,...

Not really. Take a look at the spikes in the VIX and there's reason it'll spike again because neither Europe nor the United States have fixed any problems. It's all smoke and mirrors and passing the same money around to each other and it's what the market DOESN'T predict that moves price. Never ever get complacent.

Peak:"Technical analysis is voodoo, although it can be useful."

That is possibly the dumbest thing I've seen all week. The first part is right, the second part isn't and the two parts can't live together.

 
At 8/18/2012 9:05 AM, Blogger Methinks said...

Thank you for posting that paper, Mark.

 
At 8/18/2012 10:05 AM, Blogger bart said...

PeakTrader said...

When enough people learn a technical indicator works, it stops working.


Not true for the main & key ones:

"All through time, people have basically acted and re-acted the same way in the market as a result of: greed, fear, ignorance, and hope – that is why the numerical (technical) formations and patterns recur on a constant basis."
-- Jesse Livermore

 
At 8/18/2012 11:49 AM, Blogger Buddy R Pacifico said...

"It is often and incorrectly referred to as the "fear index". It is more accurate to call it the 'uncertainty index'."

So, is the VIX reflecting, or predicting, much certainty at this time? Much less uncertainty?

 
At 8/18/2012 1:09 PM, Blogger arbitrage789 said...

My take on the low VIX is that we get a 3-5% correction in the S&P500 during September.

If the S&P500 is above the 1420 level on September 4th, I plan to bet accordingly.

 
At 8/18/2012 1:14 PM, Blogger arbitrage789 said...

Peak Trader,

"Technical analysis is voodoo, although it can be useful"

_________________

Well which is it, is it voodoo, or is it useful?

My own view is that if one completely disregards the issue of money management, then TA is more voodoo than useful.

But when coupled with good money management, TA can be a very effective tool.

 
At 8/18/2012 1:44 PM, Blogger Costa Vesos said...

My own view is that if one completely disregards the issue of money management, then TA is more voodoo than useful.

But when coupled with good money management, TA can be a very effective tool.


How? The evidence is clear that the central banks and governments have been manipulating LIBOR, short term interest rates, longer term rates, real estate markets, bond markets, and even the stock markets. If that is the case TA cannot be useful to anyone who applies it as it is intended. I would actually argue that it is useful to the manipulators as they force certain resistance and support levels to be breached and force the TA people to acquire or dump positions.

 
At 8/18/2012 2:12 PM, Blogger arbitrage789 said...

Costa Vesos

"central banks and governments have been manipulating LIBOR, short term interest rates, longer term rates, real estate markets"
___________________

The politicians are merely interested in re-election. They are not in the business of trying to move markets from one day to the next in order to push traders out of the market. (An exception to this, however, would be Hank Paulson, who did try to "squeeze the shorts" a few times back in 2008). As for LIBOR, my understanding was that this was done mostly by the private bankers, not the central banks. (Again, an exception might be Hank Paulson back in September of 2008). This is not to say that there isn't manipulation of the markets. That, indeed, probably goes on every day, but it's mostly done with individual stocks, and the politicians are not generally behind it (although they do engage in insider trading).

In the case of a broad index like the SP500, or in the case of a liquid currency market like EUR/USD, you're not going to get politicians or central bankers trying to drive technical analysts in or out of the market. Furthermore, another critical point is that people who use TA collectively trade (or invest) over a wide range of time periods; some will hold futures or currencies for 10 minutes at a time, others will hold positions for a few months at a time. So at a given point in time, some CP (consistently profitable) traders will be long a particular asset, while other CP traders/investors will be short the same asset, and yet they can both make money on their position.

 
At 8/18/2012 2:14 PM, Blogger Costa Vesos said...

The politicians are merely interested in re-election. They are not in the business of trying to move markets from one day to the next in order to push traders out of the market....

It does not matter. Their meddling screws up the price action and makes TA very difficult to use.

Which is what the argument seemed to be about if I read it correctly.

 
At 8/18/2012 2:26 PM, Blogger arbitrage789 said...

The question that I would throw out to people who believe that TA (technical analysis) is "voodoo" would be, what do you do instead? Do you follow the John Bogle approach and simply park your money in an S&P500 index fund for twenty years? I actually think that that is a good idea for many people, but with the important caveat that there have been some 20-year periods over the last 200 years that have produced some pretty awful returns, particularly on an inflation-adjusted basis.

Or do you try to pick "value" stocks like Warren Buffet or John Templeton have done, to great success?
That's easier said than done as well.

So yes, by all means, go ahead and criticize a particular strategy. But then explain what you favor instead.

 
At 8/18/2012 2:33 PM, Blogger arbitrage789 said...

Costa Vesos

I would agree that the "meddling" of Hank Paulson, Ben Bernanke, and others during Q4 of 2008 and Q1 of 2009 made trading the markets particularly difficult. But I think that will be generally true whenever the VIX is above 40 (or so).

When the VIX is above 40, I'd say that one's time frame should be either 10 minutes (with leverage) or 5 years (without leverage).

(Or just stay out altogether).

 
At 8/18/2012 4:07 PM, Blogger PeakTrader said...

If enough people believe in something, they'll make it true, until you bet on it :)

 
At 8/18/2012 6:33 PM, Blogger Ron H. said...

"It is often and incorrectly referred to as the "fear index". It is more accurate to call it the "uncertainty index". The VIX was elevated during the dot com boom of the late '90's when the S&P 500 was rocketing up 28% for the year."

And it's now low because many are certain that disaster is imminent?

 
At 8/18/2012 8:38 PM, Blogger Methinks said...

So, is the VIX reflecting, or predicting, much certainty at this time? Much less uncertainty?

And it's now low because many are certain that disaster is imminent?

The VIX measures 30-day expected (implied) volatility of the S&P 500, so a lower VIX means options traders expect less volatility over the next month. Volatility is a measure of uncertainty. So, nobody is expecting Europe to blow in the next few weeks and nobody is expecting a new killer app either.

If people were certain that disaster is coming, the price of puts (insurance) would skyrocket and the VIX would spike.

For stock indexes the skew is in the put. There are more unknown unknowns that can tank the index than can make it rocket up, thus puts are more valuable than calls.

When a killer app like the internet is introduced, uncertainty increases. More of the distribution is in the tails as the market struggles to value the new thing and the VIX rises - but not by quite as much. One of Bloomberg's server must be down because it won't return the imputed data for the late 90's right now, but I remember that it was often elevated into the 20's the last time we looked it up.

The S&P 500 index is much more likely to decline rapidly than to rise rapidly by the same amount. Thus, the VIX spikes by more when there's bad news than when there's great news.

As a small aside, there's a little less skew in the puts very recently. The ascents have been almost as breathtaking as the descents. Also, this is not a prediction of forever or even for the next year. The VIX is constructed from the implied volatility of front month options.

 
At 8/18/2012 8:40 PM, Blogger Methinks said...

If enough people believe in something, they'll make it true, until you bet on it :)

Not really. Enough people with enough money have to. Thankfully, monkeys who believe in random, irrelevant squiggles don't usually get a lot of money to manage, of it they do, they can't hang on to it.

 
At 8/18/2012 9:28 PM, Blogger bart said...

Methinks said...

Thankfully, monkeys who believe in random, irrelevant squiggles don't usually get a lot of money to manage, of it they do, they can't hang on to it.


Not true for me, or most humans.

 
At 8/18/2012 10:26 PM, Blogger VangelV said...

The chart above shows that the VIX Index closed today at 13.45, the lowest level since May 2007, more than five years ago, and more than six months before the recession started in December 2007. Investor fear in the stock market has been consistently subsiding, and market volatility is now back to normal, pre-recession levels.

Given the fact that the CBs intervene in all kinds of markets there is complacency. But we had similar complacency right before the collapse in 2007.

 
At 8/19/2012 8:01 AM, Blogger Methinks said...

Not true for me, or most humans.

Is that so, Bart? How much money have other people given you to manage based on your preferred squiggles?

 
At 8/19/2012 9:00 AM, Blogger bart said...

Methinks said...

Is that so, Bart? How much money have other people given you to manage based on your preferred squiggles?


Not true for me, or most humans.

Yes, that's so.

Sub humans or "religion" based traders or investors or money managers usually fail with TA etc.

 
At 8/19/2012 9:03 AM, Blogger bart said...

VangelV said...

Given the fact that the CBs intervene in all kinds of markets there is complacency. But we had similar complacency right before the collapse in 2007.


And many more periods than just before the 2007 crash too.

The complacent believers in low VIX etc. eventually always get zapped.

 
At 8/19/2012 11:20 AM, Blogger Methinks said...

Uh-huh. We have our answer, don't we, Bart?

 
At 8/19/2012 11:24 AM, Blogger Methinks said...

The complacent believers in low VIX etc. eventually always get zapped.

There isn't "complacent" belief in the VIX. Some people misunderstand what the VIX is measuring.

It's measuring the implied volatility - that is the vol expected by the options market - in the near term contract. So, today's VIX is saying that over the next month or so, the options market does not expect a lot of volatility. That's all.

I don't think I'm smarter than the market, but then I don't misread what the measurement is telling me about the market. This isn't the implied vol in LEAPs.

 
At 8/19/2012 11:25 AM, Blogger Methinks said...

I meant to say that I defer to the VIX because I'm not smarter than the market. But, it's important to understand what the VIX is telling you.

 
At 8/19/2012 11:33 AM, Blogger bart said...

Methinks said...

Uh-huh. We have our answer, don't we, Bart?


Glad you understand now, happy to help your educational process.

 
At 8/19/2012 11:38 AM, Blogger bart said...

Methinks said...

There isn't "complacent" belief in the VIX. Some people misunderstand what the VIX is measuring.


In the real world market, there's no difference.

The fact remains that very low VIX is strongly associated with complacency, bear market events and crashes. That's what it tells me, and feel free to have your own opinions... any hissy fits on your part are optional.


 
At 8/19/2012 1:48 PM, Blogger Methinks said...

LOL, you foolish little man.

 
At 8/19/2012 3:28 PM, Blogger bart said...

Your insecurity obviously goes very deep, you couldn't resist the hissy fit... again and as usual, and even without orders.

 

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