The VIX Rips On World Fear

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 |  Includes: TVIX, VXX, XIV
by: Wall Street Sector Selector

By Dan Nyaradi

Fear over Spain and Germany rattled world markets today and the CBOE Volatility Index, VIX, also known as the "fear index," spiked sharply higher. VIX jumped 14.4% to 18.62 today as the index tested its 50 day moving average from below but failed to close above it.

Monday's jump was a sharp reversal from recent complacency, but even so, the index closed below its long-term average of 20 after a volatile day. On equity markets, major sectors were all in decline with big losses being posted in the financial and commodity sectors.

Fear resurfaced in global markets in a big way Monday due to news from Europe and the crisis that just won't quit. Starting with Greece, the "troika" arrives in Athens to review progress towards its budget cutting targets and reports are that the IMF is ready to cut its aid to the country.

Over the weekend, Germany's Vice Chancellor voiced pessimism over Greece's chance for survival in the European Union, while bond yields in Span spiked higher over concern that several of its regions will require a bailout from the already troubled central bank.

Also on Monday, Moody's lowered Germany's outlook on its AAA rating to negative and downgraded Netherlands and Luxembourg over concerns related to Europe's mounting debt crisis. Moody's is worried about the impact that Spain and Italy's debt will have on the overall credit strength of the European Union.

iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX): +14.06%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options. The CBOE Volatility Index is also known as the "fear" index or "fear" indicator in markets. The VXX prices itself off of the average and implied volatility of the first two months of futures contracts of the S&P 500 Index.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX): +13.70%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index. The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts as traded on the CBOE. The CBOE Volatility Index is also known as the "fear" index or "fear" indicator in markets.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSEARCA:XIV): -6.4%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index. The S&P 500 VIX Short-Term Futures Index measures the volatility of the S&P 500 Index via futures contracts traded on the CBOE. The CBOE Volatility Index is also known as the "fear" index or "fear" indicator in market.

Bottom line: In recent days, markets have been extremely complacent as participants expect central banks to step up and save the day as they have since the dawn of the financial crisis. However, Monday's news from Europe and the deepening crisis in Spain ignited a new round of fear and a sharp spike in the "fear" index. Expect more fear and volatility ahead.

Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.