Afternoon Review

VIX
The VIX, which measures the cost of using options as insurance against declines in the S&P 500, has dropped over 44 percent since November 20, when it rose to 80.86, the highest in its 18-year history. (The VIX had never closed above 50 before October.)

The VIX measures fear in the market, via the prices investors are willing to pay for protective options. When the VIX hit high levels – such as the high 70s or low 80s – it indicated that there was too much fear and that everyone has already sold. As a result, supply dries up leaving the market susceptible to a rally.

Right now the VIX remains at unusually high levels compared to its historical norm; however, it has fallen quite a bit from where it has been during the past two months. That tells us the fear surrounding stocks has decreased a bit, and demand to actually buy them has crept up a bit.

Volatility may not return to its highs, but it isn’t clear when it will get back to normal, either. Volatility breeds fear, which in turn breeds more volatility. In addition, new leverage exchange-traded funds, off-exchange trading vehicles and other market advancements are adding to the churn. Nevertheless, the lower readings in the past week or two are seen as a positive for the equities market.

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Peter Lazaroff, Junior Analyst