The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is referred to as the “fear gauge” for investors. Very simply put, this index indicates whether there is too much optimism or too much fear in the market.
The Volatility Index is inversely proportional to the market stock indexes. When the markets boom, the volatility index drops, indicating market optimism. If the stock market starts dropping, the volatility index starts rising, indicating rising fear for investment.
Volatility Index Optimism
The Volatility Index is inversely proportional to the market stock indexes. When the markets boom, the volatility index drops, indicating market optimism. If the stock market starts dropping, the volatility index starts rising, indicating rising fear for investment.
This week, the Volatility Index dropped down to 9.19. The last time the indicator was that low was the year when it was created, 1993. That year, the index dropped to 9.31 on December 22.
The CBOE collects data from the S&P 500 options series to calculate – in real time – the way in which the volatility index will move in the next 30 days. By analyzing the way the VIX is acting in relation to the S&P 500, an investor can gain a lot of insights into how the markets will move in the near future.
While the Volatility Index has been in existence for just 13 years, there is enough data to notice trends. For example, data shows that August tends to be the most volatile month of the year, followed by September and October, before things settle down for the last quarter of the year. This year, however, things have not followed the trends. September is being touted as the “least volatile” September ever. Stocks are up and the market is booming.
There was a slight spike in the middle of August before the VIX started dropping continuously throughout September. This is despite geopolitical tensions between North Korea and the US, the 2 disastrous hurricanes to ravage America’s coasts and the general chaos in Washington.
The Historic Fall of The VIX
The VIX, in its 13 years of existence, has dropped below 10 only 36 times. Of those 36 times, only 8 were before 2017. This year, the VIX has fallen below 10 28 times, and for the first time in its history, stayed below 10 for 5 consecutive days.
To understand what this means, we need to look at the VIX in relation to the S&P 500. If the S&P 500 moves down and the VIX moves up, it means that the market’s slump is going to last some more time. If both indexes move in the same direction, then it means that there is soon going to be a reversal. If the S&P is going up and the VIX going down (as is the case currently), then it means the market boom is going to continue for some time.
Some analysts are warning of dire consequences to the current markets’ record breaking climbs. That the markets could be heading for a downward spiral very soon. Some analysts have even pointed to similar trends in 2006-2007 – just before the markets crashed and led to another financial crisis.
However, Mark Sebastian, founder of OptionPit.com, feels that it will take something really, really bad to bring a halt to the current market optimism. According to him, seeing the current movements in the volatility index in relation to the S&P 500, the markets still have room to grow. This is the time of the year when the markets are traditionally bullish. And so far, this year doesn’t seem to be different; in fact, the markets are doing exceptionally well for the season. This means, keeping in mind all the factors – a strong Q4, economic data pointing to a growing economy and markets being able to shrug off geopolitical turmoil and natural disasters – the current bull-run will continue for some time.
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