Tags: Fear | index | vix | Illusion

CNNMoney: Fear Gauge at 5-Year Low Is 'An Optical Illusion'

By    |   Friday, 16 Mar 2012 12:51 PM

The "fear index," the Chicago Board Options Exchange's index, or VIX, is near a five-year low. But that's just an optical illusion, say experts who warn that fear is close at hand, according to CNNMoney.

"The smart money is betting on only a brief respite from volatility," says Janet Tavakoli, president of Travakoli Structured Finance, according to CNNMoney.

In fact, VIX futures point to a return of volatility as early as April. The index recently reached 15 after the government announced that most banks had passed its stress test, but the April VIX is around 22. By comparison, it almost reached 50 last August when Standard & Poor's downgraded the federal government's credit rating during the budget limit battle.

"Investors are expecting the VIX to rise significantly in the next month," adds Jamie Tyrell, a derivatives trader with Group One in Chicago, according to CNNMoney. "There's a bet that over the next month we'll move into an environment where the market is moving more on a daily basis."

Stock market bears warn that stocks typically take a dive when the VIX reaches 15, writes David Moenning, a money manager and financial advisor, in an article for Inside Futures.

"The 15-level does indeed appear to be a magical signal that things are about to change — and not in a good way for stock prices," writes Moenning, who owns StateoftheMarkets.com, an investment education website.

On the other hand, during the bullish times from 2004 to 2007, stocks didn't fall until the VIX reached. 10.

"Yes, it is true that stocks are now overbought and due for a pullback," he writes.

"And as such, yes, the 15-level may once again be an indication that stocks may be ready to pull back. But before you bet a lot of money on this idea, make sure you understand that indicators act differently in different market environments."

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