The calm before the storm

VIX, daily, January 1st 2004 to August 21st, 2012

The VIX (more properly known as the The CBOE Volatility Index [ .pdf ]) is a rough proxy for the amount of fear in the markets. Values north of 30 generally indicate there is a high level of fear and stress in the markets and lower values indicate less fear and less stress. I like to watch the VIX not because I trade it but because its an excellent indicator of investor’s outlooks. The chart above tracks the VIX daily from January 1st 2004 to the present. Clearly during the depths of the credit crunch the VIX was trading at record levels, consistent with the overall environment and what was happening at the time. But now it has dropped to pre crisis levels, as illustrated by the horizontal red line I’ve drawn, so what’s going on? Some try to explain this away, calling it the great moderation of volatility, while others consider it little more than unfounded complacency. I’m in the latter camp, there is far too much possibility for a market event and I’ve already suggested a market correction was imminent, so this drop in The VIX is very much the calm before the storm.

Oh yeh, the table below shows the daily change in The VIX – curious about Mondays, folks seem to want to purchase protection against sharp moves at the start of the week; I’m gonna look into that a little further as time allows.

CBOE VIX - % change, daily, by day of week, 2004 to 2012

CBOE VIX - % change, daily, by day of week, 2004 to 2012

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