Tuesday 12 March 2013

VIX is making a 6 years low, is it good or bad?

Dear Friends,

One of the indicators to study for market sentiment is breaking a 6 years historical low not seen since Apr 2007. VIX on monday stands at 11.56. VIX is widely labeled as the FEAR index and is normally inversely proportional to the stock market. In short it studies the S&P500 options to measure its volatility. High volatility often is caused by uncertainty and fear in the market. Low volatility often suggests calmness and joy in the market. Below is the chart:

We have entered into a phase where VIX is kept below the $20 mark, a place that signifies low volatility.

Is it a good thing or bad thing?

I hope it is not calmness before the storm. VIX one day will burst forward when panic grabs the market. We got a slight taste 2 weeks before when it shot up more than 30% 2 times in 4 days.

At the moment, let us enjoy the bull run in US. But also keep in mind that once VIX consistently rises, it may be time to leave the market.

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