Wednesday, November 18, 2009

Fixated On The VIX

Seems a day does not go by that a market commentator can't resist mentioning the low level of the VIX and the potential implication for the market's future direction. The reason this fear index is in the news is low levels of the VIX tend to be a signal of a market top. I wrote a post in October of last year titled, What is the VIX Index, that provides background on this market measure.

Many commentators are suggesting that the current current level of the VIX, 21.8, is one reason to be skeptical of the current level of the stock market. Certainly the +50% advance off of the March low is reason to be cautious; however, the current level of the VIX doesn't necessarily indicate a market correction is around the corner. As the below chart notes, during the mid 1990's and early 2007, the VIX reached a level near 10.

So just because the VIX is near 20, this does not necessarily foretell a market correction around the corner.

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