Is a Calm VIX Good News or Bad News?

| About: SPDR S&P (SPY)

Earlier today, I read the following from a well-respected analyst/pundit concerning the VIX:

The CBOE Volatility Index (VIX) fell to a low of 16.17 on Friday. The last time we saw a number on the VIX that low was in May of 2008, just prior to the fall from 13,000-plus to 10,970.

The implication was that the market is complacent, rolling over, and in his words, it’s time to “raise cash and be defensive.”

Is that quoted statement accurate? Yes. Is it misleading? Also yes.

It is true that the last time the VIX was at current levels was in 2008, just before the steepest part of the market crash that had begun in October, 2007. However, if you widen out the VIX chart to a 10-year look, you see a totally different pattern from the one implied by the statement above.

When the VIX hit 16 in 2008, it was rising, with increasing volatility. That presaged the market fall that the analyst referred to. But that moment in time had been preceded by a 3½-year period in which the VIX spent practically its entire time in the 10-20 range with low volatility. That period—from late 2003 to early 2007—coincided with a steady uptrend in the market. The Dow rose from about 9600 to about 13,000—about 35%--during that timeframe.

Currently, the VIX is falling, with decreasing volatility, from a high of about 80 at the beginning of 2009 to its current level of about 16. The correct comparison is not between the VIX’s current level of 16 to the last time it was 16. The correct comparison is to the last time the VIX looked something like it does now. That would be mid-2002 to mid-2003, the last time the VIX was descending, with decreasing volatility, from a multi-year high to a level of 20 or below. The post-dot-com bear market, of course, ended in October, 2002, ushering in 5 years of a rising market that did not peak until October, 2007.

Mark Twain said, “There are lies, damned lies, and statistics.” The statistic quoted at the beginning of this piece is the sort of thing he was talking about.

Disclosure: No positions