Thursday, December 23, 2010

Christmas Card from the Stock Market: The CBOE Volatility Index Returns to Pre-Crisis 2007 Levels

The CBOE Volatility Index (VIX) is a "key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility."

The VIX Index closed yesterday at 15.45, the lowest closing value for the stock market's "fear index" since July 19, 2007, almost three and-a-half years ago.  A little more than two years ago, the VIX reached an all-time record high of 80.86 on November 20, 2008 as fear gripped the stock market and the financial crisis was spreading globally.  The fact that the VIX Index has returned to the pre-crisis levels of the summer of 2007 provides further evidence that the worst of the financial crisis is far, far behind us, and the U.S. stock market has made a lot of progress towards increased stabilization and reduced volatility.  2011 could be a great year for the U.S. stock market and the U.S. economy.


At 12/23/2010 10:25 AM, Blogger VangelV said...

It is interesting how everyone is so complacent even as unemployment remains stubbornly high and the country is heading towards bankruptcy. Fiat currencies around the globe are in trouble. Countries have chosen to bail out weak banking systems and engage in protectionism.

The bond market is on the ropes. States and municipalities are running out of money. Oil is around $90, silver is near $30, while cotton, copper, gold and a number of other commodities are near multi-year highs. I would ignore the VIX and bet on huge volatility over the next few years. Use any serious pullbacks to buy precious metals, agricultural commodities and energy for the long term and leave the optimists to gamble on the general market, bonds, and fiat money.

At 12/23/2010 10:32 AM, Blogger morganovich said...

i am still confused as to what you perceive this to mean.

the vix is just a measure of implied volatility on options contracts.

it is always high during stock crises, and always low right before they begin.

it has no forward predictive value except as a contrary indicator, and then only at extreme values. (extremely high vix is bullish, low vix is a sign of complacency)

vix is a coincident indicator at best and truly more of a trailing one.

8/30/08 saw a vix of 20, down from a high of 30 in july. clearly, that was not bullish. nor was the this year's vix low at 15.50 on 4/21, 3 trading days before a 2 month sell of on the S+P that took 17% out of the index.

all a low vix shows you is that the market is up a lot and there is little fear of a correction. those are precisely the conditions that create a correction.

you could more easily make the case that a low vix is worrying

At 12/23/2010 11:14 AM, Blogger Buddy R Pacifico said...

Bill Luby, at the VIX and More blog, says investors are on holiday from fear! He says take a look at the VIX at the beginning of the year when normal trading days resume. I wonder if VIX futures are a buy now because they are on sale?

At 12/23/2010 11:27 AM, Blogger Boyd K said...

Perhaps it's a Christmas card if you plan to short the market. In the two years and a month after that November 2008 high VIX reading, the S&P 500 is up 67%. In the two years and a month after that July 2007 low, the venerable index had tumbled 36%. It seems to me that the value of the VIX, if value it has, is as a contrary indicator.

At 12/23/2010 11:32 AM, Blogger PeakTrader said...

The stock market is a leading economic indicator, because it discounts the future.

The U.S. economy is on track to improve short-term, over the next year. However, it's uncertain if it'll continue to improve or worsen thereafter. It'll depend on what happens in 2011.

At 12/23/2010 11:36 AM, Blogger morganovich said...


i'd be very careful with the vix futures.

they tend to trade at a significant premium to spot.

the jan '11's are over 19.

as a general rule, you'll make more money shorting them than buying them because the demand for them as a hedge against a long equity portfolio is so high.

that said, they pay out big in market crashes, so if you time them correctly, you'll really make out.

avoid the vix options entirely. they are euro exercise, and as a result barely move at all until they are very near to expiry.

At 12/23/2010 2:33 PM, Blogger Buddy R Pacifico said...

This comment has been removed by the author.

At 12/23/2010 2:35 PM, Blogger Buddy R Pacifico said...

morganovich, thank you for your insight and advice - I will avoid the VIX option market.

The point of Prof. Perry's chart and narrative should be appreciated, fear has gone away. Christmas of 2008 was frightening for financial markets.


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