Tuesday, June 14, 2011

VIX Not Showing Much Worry

The VIX index was created by Robert Whaley in 1993 as a measure of implied volatility of S&P 500 index options. It represents the expected market volatility over the next 30 day period, and therefore, is a way to measure fear or complacency in the market. Lower numbers indicate that investors are complacent and higher numbers indicate that investors are more fearful.

The chart below shows the VIX index from 12/31/07 to current, and you can see the volatility spikes during uncertain times. In 2008 the index spiked to 80 during the Great Recession as the fear gauge went wild, 50 during the Euro Summer of 2010, and 30 during the Japanese nuclear meltdown crisis. But looking at the far right of the chart this current sell off is marked by pure complacency up to this point. The index has moved from 15 to 18 which is an extremely minor move.

And thus, I ask myself what does this mean? In the summer months volatility is usually depressed so is this just a case of the summer doldrums rolling along? Has the speed of the decline been fairly tame? There have been no scary stories to hit the wire during this latest sell-off. The market has slowly melted down as growth concerns have been building over the last two months. Maybe this is the market telling us that this is just a correction and nothing more but if the index rises back above 20 I would start to worry more.