Despite Down Day for Stocks, VIX Creeps Lower

The chart above shows the Volatility Index, or VIX. The VIX is sometimes called the "fear index", for it spikes higher when there is fear amongst traders, and moves lower as complacency sets back in.

As such, it usually move inversely with the overall market. On a down day like today, it normally moves higher. That is why the VIX stood out to me today. Although it was higher in the early going, it reversed lower as the day wore on, and finished down -1.3% for the session.

First off, let me just say that a lower VIX is bullish for the overall market. Especially a move lower from the extremely high readings we have been stuck at for the last 6 months. I would like to see the VIX eventually get back down below the 30 level. This would be a good sign that the market was returning to some "normal" level of daily volatility.

But the move today could have been influenced by some news that could come as early as tomorrow from the SEC regarding the 'uptick rule'. If the SEC moves to modify the uptick rule, which I think is likely, it would equate to lower volatility at the margin, and have a downward influence on the VIX.

Here is a summary of today's market action:

• Stocks fell for a second day as the market confronted the beginning of first quarter earnings season.
• Wall Street anticipates a seventh straight quarter of declining profits. Today’s selling was orderly and appeared to fall under the umbrella of “normal profit-taking” following big gains in March.
• Investors had to deal with a number of troubling issues. Confidence among chief executives of American corporations dropped to a seven-year low in the first quarter. Moody’s Investors Service said the default rate for corporate bonds was the highest in March since the Great Depression.
• Emerson Electric (EMR) delivered a bit of good news. The company cut its earnings forecast, but the end result was not as severe as many expected. The stock closed unchanged at 30.89.
• Managed health companies lifted after the government announced a bigger-than-expected rate increase for Medicare plans. Humana (HUM) gained 1.61 to 27.92.
• The Dow closed down 186 at 7789.
• NYSE volume totaled about 1.26 billion shares.
• The S&P 500 was down 19 points. The Nasdaq fell 45.
• Declining issues beat advancers by nearly 4-1 on the NYSE and by 3-1 on the Nasdaq.
• The 10-year Treasury note was up 9/32 to yield 2.89%.

Comments

[sr9web:]

The VIX drops when traders become more resolute - it's not only correlated with market prices, but also with trader attitudes. This means that even when traders expect the market to drop, the VIX can still drop too.

You need to think this through carefully.

Apr 07 10:39 PM

[market ace:]

I read a lot about the VIX and many writers are now saying it is dropping so things are returning to normal and it all looks good for the markets. Obviously there is some validity for this, but I think you also miss substantial contradictory factos just looking at charts and graphs and ignoring real facts.

It would only be normal for fear to subside somewhat after investors have already lost 40% or more of their money. That obviously gives them less to worry about, but not in a positive way.

Investors have been hit with so much bad news that they look for any glimer of hope and apparently have tuned out bad news completely in order for the markets to rally, because the economic facts today and looking forward for quite awhile sure do not support any rally. Consequently, apathy is very high right now and that overrides fear thus lowering the VIX, but again it is not necessarily positive.

Investors are constantly relying on the next Gov't bailout, change in the rules or ill conceived plans to save them and they keep coming at a rapid rate, but there shoud be great fear that they will not work and then what - the depression deepens and the markets finally correct themselves, but not without massive financial pain.

There is an obvious lull in negative investor sentiment right now. Investors and people in general want to be optimistic and hope things will get better very soon, but that does not change the reality that they should still be very scared. The markets are on a hair trigger right now and I believe the chances of a down turn are far greater than a sustained upturn. So no matter what solace you find in your VIX chart beware.

Apr 07 11:05 PM

[Mad Hedge F...:]

And it will continue to do so. There is a great debate raging in the markets right now over the stubborn persistence of the volatility index (VIX) remaining over 40%. Is it still too risky to go back into the market? Are we going to new lows? Is the next big move an updraft or a downdraft? Part of the confusion springs from a misunderstanding of what the VIX is. It is just a mathematical guess about how big the next move in the market will be. A 40% VIX implies that one out of three days will see a 2.25% palpitation, and once a month we will suffer a 4.5% gyration. You can have the market drop 10%, rise 11.1%, remaining unchanged, but still generate a tremendously high VIX. The equation doesn’t care what the direction is. VIX unfairly picked up a bearish connotation because of the panicked rush by long side only investors to buy downside protection in falling markets, driving put implied volatilities through the roof. This is why investors associate a high VIX with falling markets. In the end, this debate can only be resolved in one way, and that is to the downside. Smart hedge funds are now shorting out of the money calls on VIX. VIX will crash when markets go to sleep, as they inevitably will. Be careful what you wish for. Traders don’t pull down million dollar salaries playing “Solitaire” on their computers.

Apr 08 09:25 AM

[Jordan Kahn:]

this was a great call on the VIX. wish I had bought those puts!!


On Apr 08 09:25 AM Mad Hedge Fund Trader wrote:

> And it will continue to do so. There is a great debate raging in
> the markets right now over the stubborn persistence of the volatility
> index (seekingalpha.com/symbo...) remaining over 40%. Is
> it still too risky to go back into the market? Are we going to new
> lows? Is the next big move an updraft or a downdraft? Part of the
> confusion springs from a misunderstanding of what the VIX is. It
> is just a mathematical guess about how big the next move in the market
> will be. A 40% VIX implies that one out of three days will see a
> 2.25% palpitation, and once a month we will suffer a 4.5% gyration.
> You can have the market drop 10%, rise 11.1%, remaining unchanged,
> but still generate a tremendously high VIX. The equation doesn’t
> care what the direction is. VIX unfairly picked up a bearish connotation
> because of the panicked rush by long side only investors to buy downside
> protection in falling markets, driving put implied volatilities through
> the roof. This is why investors associate a high VIX with falling
> markets. In the end, this debate can only be resolved in one way,
> and that is to the downside. Smart hedge funds are now shorting out
> of the money calls on VIX. VIX will crash when markets go to sleep,
> as they inevitably will. Be careful what you wish for. Traders don’t
> pull down million dollar salaries playing “Solitaire” on their computers.
>
>

May 20 12:40 PM