Tags: vix | fear | Index | volatility

‘Fear’ Index Enters Hibernation Mode — But Ready to Stir

Wednesday, 08 Feb 2012 08:41 AM

A closely watched indicator that measures volatility has gone from rattling nerves in 2011 into hibernation mode, leaving market watchers scratching their heads.

The Chicago Board Options Exchange's Market Volatility Index, known as the VIX, is set to finish its 14th straight close below 20, a long-term average, The Wall Street Journal reports.

The VIX takes options prices to gauge the market’s expectations for future swings in the S&P 500, often falling when stocks rise. Often referred to as the "fear index" or the "fear gauge," it represents one measure of the market's expectation of stock market volatility over the next 30 day period.
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"The VIX came close to 50 over the summer and was over 30 as recent as early December," the Journal points out.

"Lackluster corporate earnings haven’t been enough to wake the sleepy volatility gauge. Any shocks out of Europe could do the trick. But for now, the VIX is signaling an all-clear signal. Enjoy it while it lasts."

Still, others point out that the index is acting funny.

The VIX, which measure how volatile the market might act in the coming month, is just below 20.

However, the index that measures how volatile the market has behaved in reality, known as the VolX, is around 9.

Normally the spread is much tighter, which means the VIX may be low numerically but still forecasting danger ahead.

"If you need an analogy to figure this out: right now, the market (historic volatility) is acting like it's a 45-year old mother with a perfect driving record, and insurance (the VIX) is pricing like it's a 16 year old that just got his license. There’s a disconnect," CNBC's Bob Pisani writes.

"Who’s right? My bet is that the VIX is right: whether it's pricing in Greece, or Iran, or lousy economic numbers, it seems to be saying there will be an increase in the speed at which the market will be moving — at any rate faster than we have been seeing."

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2012-41-08
Wednesday, 08 Feb 2012 08:41 AM
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