Interpret a Stagnant VIX As You Will

While the S&P 500 has fallen 6%, and 7 out of 10 trading days this year have been 1% days, the VIX index (30-day expected volatility) has been relatively stagnant. When the index made lows in August and November, we saw the VIX spike above 30. The recent free-fall to new lows was met with a VIX move to just over 25.

The VIX is also known as the investor fear gauge, so fear isn't currently as high as it was in late 2007. Bulls can interpret this as a positive (investors aren't really as scared as the market is implying) while bears can interpret this as a negative (still too much optimism out there). Please let us know how you interpret it in the comments section below.

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Comments

[nliinton:]

I've read in a few places that the opposite of volitility is liquidity. Could the stagnant volitity be a result of the high levels of liquidity being pumped in by the Central Banks?

2008 Jan 16 03:55 PM

[Robert DiAl...:]

Could see a rally and maybe the Fed will give us the 50 basis points this Friday

2008 Jan 16 04:02 PM

[Tristan Yates:]

The VIX is a forecast of volatility, so this level means that the market believes there is a 66% chance that the price one month from now will be within 7.22% of today's price. (25/3.46=7.22). This forecast could be wrong - during the first part of 2002 implied volatility was much too low given the losses that option sellers were taking. Then it overcompensated and was too high in 2003. We have an article in Febuary's Futures & Options trader about how the best timing for covered call and similar strategies is actually a few months before the upturn because implied volatility is still high but all of the large losses have already been taken.

2008 Jan 16 04:18 PM

[vboring:]

stagnant, yes. but also quite high.

people are clearly worried, but willing to hold tight to see whether or not the next shoe drops.

2008 Jan 16 04:51 PM

[Echo To All:]

currently, the vix is representing the longer-term bearishness of the overall market... no spikes in a down market is not good in general. (at least that is what my obervation with the vix has told me over the 2yrs correlating it with the market day to day.)

doesn't mean we go down tomorrow, but we just haven't seen a bottom yet.

2008 Jan 16 06:04 PM

[DEcho:]

With the big players overweight in cash (ref: recent survey among European fund managers), and the bagholders feeling it's already too late to get out, I think we have a high level of apathy for those still active in the market..
So what comes after apathy ? Two possibilities: Apathy turning into fear when reality sinks for latter group, giving another leg down. Or cash coming into market again...

This is just me speculating ofcourse, any feedback most welcome..

2008 Jan 16 06:31 PM

[Cormack:]

Any analysis on the VIX has to defer to that of Larry Connors.

2008 Jan 16 09:14 PM

[Valueplay98:]

I've been wondering about the lack of a spike in the VIX, also ... I think it is due to the impending Fed cut on Jan 30th.

2008 Jan 16 09:52 PM

[jr7107:]

It appears somewhat that there is demand for stocks at least in the short term.

2008 Jan 17 12:10 AM

[granger:]

How about, that it is a measure of the cost to buy protection (options). Maybe all of the needed protection has been bought. So as the market rides lower people are just sitting tight with existing positions.

2008 Jan 17 11:55 AM

[granger:]

Follow up, if my prior interpretation is correct. That is a crowed trade (being short). I think we are in for one hell of a short coming rally, like we have never seen. The VIX will be wild during the spike to cover then start a slow gradual downrend as we expereince a sustained market rally. There is only one asset that outpaces inflation consistently. EQUITES!

2008 Jan 17 11:57 AM

[Trader T:]

The VIX hasn't spiked because the market is 'comfortable' or 'agrees' with the recent downturn. We might get a 10% recovery off our lows in the short term but the market looks like it will do a slow bleed at least through the spring.

The VIX spike in the summer was a response to the bank problems seen through bull market eyeglasses. The bull market is gone.

2008 Jan 18 09:25 AM

[DEcho:]

History is history, it was a time to buy options.

2008 Jan 24 07:36 PM