Recently, not a day has gone by when investors have not been bombarded by mentions of the CBOE’s Vix Indicator (the “Fear” indicator) and the scarily-low levels where it’s been trading …a very bad omen for the market (“What’s lurking under the low Vix?”). Some of CNBC’s talking heads are referring us back to the last time VOLATILITY, as represented by the Vix, was so low for prolonged periods.It was around 12 for a couple of weeks back in 2007…and we all know what happened in 2008. What they forgot to mention, is that the Vix was trading in the low to mid-teens in the two years before, a period in which the S&P 500 gained 25% (see the chart below).
I am not going to try to explain the computation of this index, or exactly how it generates its data (much above my pay grade). Suffice to say it is a set of equations looking at the level of put vs. call volumes in the S&P 500 options. From this data the developers claim we can glean information on market sentiment. You want more? Here’s a link to the CBOE’s web site. Go for it.
In the meantime, to put a “12” reading into context, the Vix has averaged about 20 for the past twenty years. The further the index drops below 20, proponents would tell you it could be a sign of growing complacency (or fearlessness) on the part of investors. Likewise, the further above 20 it moves, is seen as a signal of fear and angst is entering the marketplace. For example, at the lows of 2008 /2009 the Vix peaked at 80 (now that is fear and trepidation).
What is interesting about that 80 reading is that it was a reading of extreme pessimism and fear. During that tumultuous period I never heard anyone in the media proclaim that the Vix was shouting “BUY!” In fact, in the last 12 months the Vix, which has been averaging about 15, has spiked to 20 three times (in the less-than-ten-percent corrections we have been getting) and nobody said “time to buy.”
On 6/6/2014, the Vix traded with a ‘ten handle’ (Wall Street parlance for a price between 10 and 10.99) and, again we heard one of the pundits on the “Closing Bell”(6/6/2014), Susan Ochs (Senior Fellow at something called the Aspen Institute) dredging up the specter of 2008. The clip, “Parsing low volume, low volatility” contains some interesting thoughts on the current market, but Ms. Ochs does not distinguish herself tying the low readings on the Vix to 2008. One of the commentators, Zachary Karabell, may have surfaced the 300 lb. “sentiment gorilla” in the room, when he brought up the lingering effect of the 2008 market meltdown on investor psyches. In the back of everybody’s mind, it’s the lingering question of ‘what, when and why we get our next smash-up?’
If you really want to see some great market performance, check out the Vix in the late ’90s when the bottom of its trading range seemed to be 20 and it was spiking into the low 40’s on angst. This spiking of the “fear indicator” came at a time that many consider was “irrationally exuberant.” Go figure. This was an explosive market, more than two years before the March, 2000 collapse (Chart, courtesy Bespoke Investment Group).
But the debate goes on as to wether we should ‘hold em, or fold em.’ I’ve attached a link to a June 7, Barron’s article, by Ben Levinson, supportive of my case. And, I give you a counterpoint with a June 8, headline article from MarketWatch, prominently featuring “VIX at 2007 low…” They just won’t let this go on this one.
I’m not sure what to make of all this, save, that it would seem to be hard to make money as a long-term investor using the Vix as your guidepost. If we continue to move higher, the Vix will die as a media talking point.
What do you think?
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