For those that don’t know the VIX*, it is a volatility index which acts as a “fear gauge” for the market (S&P 500). When markets sell-off, the VIX surges. Since the onset of the crisis, the VIX has been trading wildly. Bears were betting it would increase and were buying calls on it. Bulls were hesitant and wanted to hedge themselves by having calls too.
Recently, I have noticed that the market has been complacent and has been grinding up especially since the Greece scare. Looking at the VIX graph below, it is evident that every month or so the VIX has an average one day jump of 25% or so. Since the market’s direction has been up and confidence has been rising since the 2008 crisis, the VIX’s long-term trend is down. However, it is worth short-term trading as its deviations suggest ample profits when the timing it right. The latest spike was initiated by the Greece debacle and resulted in a >50% gain. It was then followed by another 25% gain in the same month.
Is the VIX setting up for a rebound initiated by a market sell-off? I think so.
*According to Bloomberg, the definition of VIX Index is: The Chicago Board Options Exchange SPX Volatility Index reflects a market estimate for future volatility, based on the weighted avergae of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then 2nd and 3rd are used.
(1 votes, average: 4.00 out of 5)
Loading ...Tags: VIX, Volatility Index
What magnitude of VIX rebound and for how long?
Short-term, maybe yes?
If VIX can trade above 30 for a few consecutive days, or better yet, close above it for a couple of weeks, then the market may have put in a meaningful top.
I doubt the current bull market in stocks is exhausted because if VIX still serves as a decent signal coupled to market performance, directly of course, then it it is difficult to see how one can confidently bet the market is about to turn downwards for an extended period when obviously the VIX is now in a bear market. The parabolic spike in 2008 is something worth noticing.
Sure one can bet on VIX bottoming around these levels but its a safer bet above 30.
Just a guess here: We could see VIX reach 13-14 this year, without seeing 30 again.
[Reply]
Raad Reply:
March 21st, 2010 at 12:22 pm
Don’t under estimate the greed of the VIX !
We are at a very low base compared to the last two years’ average, coupled with more uncertainties and unfavrouble economic indicators. More bad than good news is out there.
In 2010, we could see spikes here and there the like of the Greek situation.
[Reply]
the vix reflects the current mode in the market, and i think the market are believing that worthless companies and bankrupt economies will be always bailed out. anything that will keep this system afloat will be applied. because the alternative is, in their view, is hard to swallow
so flood em with cash (indirectly) through all means.
That lowers the cost of equity by lowering the risk really. and that spiks rallies and as we all know in rallies the VIX stays low!
the bigger risk is now shifting to the currencies – the baramoters of the health of a certain economy – they have had quite a ride since ‘08.
another intersting thing is the yet unwillingness of banks to lend, despite the major run the equities had. that is another worrying sign.
[Reply]