If you follow the markets on CNBC or one of the many business media sources you may have heard of the VIX or Volatility Index. The VIX measures how concerned options traders are that stock prices will drop. The beauty of the VIX is in its contrary indications. More or less you could view the VIX as a comfort indicator. We all know that most market drops (even rises) are seldom seen far in advance.
VIX history
The VIX, like all market indicators, does not have clear signals, and does not always have market turns at its lowest and highest points. Many times the VIX will have lower lows or higher highs before a market turn. I would liken the VIX to the hair standing up on the back of you neck when your senses perceive trouble. Trouble may not be upon you but something is telling you it is coming. Personally, I find the usefulness of the VIX is to look at it in relation to recent history.
Lets take a few market periods and look at the VIX relative to the markets.
July 13, 1998 VIX at 16.23 and the S&P 500 at 1186 From July 13th to August 31, 1998 the market drops 13% – This is the Asian Financial Crisis.
August 14, 2000 VIX at 17.53 and the S&P 500 at 1520 From August 14, 2000 to September 30, 2002 the market drops 47%. – This is the Dot Com blow up.
July 9, 2007 the VIX at 15.15 and the S&P 500 at 1552 From July 2007 to March 6th 2009 the market drops 55% – This is our recent financial crisis.
January 19, 2010 the Vix at 17.58 and the S&P 500 at 1150 From January 19th to February 8th the market drops 8%.
Where are we now?
The VIX sits at 17.57 at mid day on March 8, 2010. As you can see from above in the recent past this level is a place of concern. On top of the VIX, the reality is unemployment is not good and housing is in terrible shape. I have long said that without stability in the housing market the economic recovery will not go far. A recent article in the Financial Times from Mort Zuckerman titled “America must help its homeowners” agrees with my assertion about housing.
Take a look at the VIX chart and see what you think? Remember too high a VIX means everyone is fearful and you should not. Too low of a VIX and everyone is overly optimistic. If you draw back this level is just about where the crisis started. At least before the crisis unemployment was much lower and government debt in the US and abroad was much lower. Watch out.
Chart courtesy of StockCharts.com