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Even though the market is barely up on the day at the moment, the VIX volatility index is down more than a point and has broken below 40. As shown in the long-term chart of the VIX below, prior to the current bear market, the VIX seldomly moved above 40. However, since last September, the VIX has remained solidly above 40. Since the VIX is widely considered a "fear" gauge that rises along with investor nervousness, the bulls would like to see the index break solidly below 40 for a longer period of time.Rather than a measure of fear, the VIX has been closer to a reflection of actual volatility of the market. As the chart below details, the VIX has moved almost one-for-one with the actual volatility of the S&P 500, as measured by the rolling one-month standard deviation of daily price movements of the S&P 500 annualized (assuming 252 trading days in a year).
Source: Yahoo
If you overlay Gold prices on top of that, I bet you'll get another well-correlated graph.
ReplyDeleteVIX measures the Cost of insurance against volatility. The more volatile, the greater the cost.
ReplyDeleteJust because VIX is declining doesn't mean the market won't decline further; it just means the market will move (decline) in a less volatile way.
i agree that a decrease in the VIX decreases the cost of insurance against volatility, but it also decreases the cost against a decline (put options become cheaper). however, it doesn't necessarily mean the market will decline in a less volatile way, it means that the market has already been less volatile and/or expectations of volatility are lower...
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