The VIX Is All Right

Gaurav Khanna profile picture
Gaurav Khanna


  • The commentary that the "VIX as not accurately reflecting fear" is misleading.
  • The VIX should only be used for what it was designed, and is best used with other indicators to forecast danger.
  • The VIX is accurately reflecting sentiment in the face of geopolitical upheaval and Federal reserve policies.

The map of the Middle East is about to be redrawn in the midst of the worst sectarian fighting in Iraq in a decade. The terrorist group ISIL, threatens to wipe out any socio-political gains the US made in region and disrupt oil supplies coming from OPEC's second largest producer. Rising oil prices, which impact virtually every aspect of global commerce, will surely threaten an already fragile economic recovery in the United States.

… and the S&P500 (SPY) just hit another record last week.

Heard this story before? This is the exact pattern that we have observed going back to the Fiscal Cliff drama of 2012. In fact, geopolitical flare-ups have created some great trading opportunities for those who were brave enough to look past the headlines.

To illustrate this, I have compiled a list of some of the major negative market-moving in the past three years and the market's subsequent recovery. The figure below also highlights these events against a seven-year chart of the CBOE VIX index (VIX).

With the exception of the US debt downgrade and the subsequent European sovereign debt crisis the summer and fall of 2011, most of the hiccups in the market were relatively short-lived. In addition, the percentage declines and the time to recover are both getting shorter.

Mind you, none of the issues in the table above would be considered "resolved" today by any means - European sovereign debt, Ukraine, Argentina potentially defaulting on debt, and certainly not Iraq. Once these issues settle into some kind of "stalemate" or the immediate threat recedes from the headlines, bullish sentiment returns very quickly.

The stock market's inexorable rise has spawned a lot of attention on the VIX, commonly referred to as the "fear gauge." Currently trading near historic lows at around 10, the VIX is often cited in commentary

This article was written by

Gaurav Khanna profile picture
Manager of the Fifth Quarter Fund, a long/short equity hedge fund based in San Jose, CA. Multiple years of investing in stocks and options, with a recent focus on trading volatility ETFs and options.

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