What to Make of the Rising “Fear Index”
by Robert Williams, Contributing Editor
Monday, October 5, 2009
The Chicago Board of Options Exchange Volatility Index (^VIX), also referred to as the “Fear Index,” spiked by over 30% in last week’s trading.
The VIX tracks prices investors are willing to pay for options on the underlying stocks of the S&P 500, often to protect against drops in the market. The higher the demand for such instruments, the higher the prices go.
Thus, the principle idea is that rising premiums on options (puts and calls) can be directly associated with increasing anxiety levels among traders. (The benchmark for absolute panic is the 89.53 reading logged on October 24, 2008 – at the height of Wall Street’s meltdown.)
So given the recent surge in the VIX – from 22 to near 30 – should we be running for cover?
Absolutely not.
| Understanding the VIX Values | |
| <10 | Complacency |
| <25 | Normal |
| >25 | Fear |
| >40 | Panic |
Late September and early October is a historically rough-sledding time for stocks. Think of it as a collective exhale, as Wall Street institutions and traders alike reflect on the year’s price action. And ultimately decide how best to play the home-stretch run.
We’ve pushed stocks a long way off those infamous March 9 lows. Heck, the price-to-earnings ratio on the S&P 500 actually sits higher than it did before the crash.
But as long as companies beat analysts’ watered-down performance expectations in the coming earnings season, we’ll be fine. In fact, a favorable batch of earnings would likely set the stage for a year-ending Santa Claus rally.
Ahead of the tape,
Robert Williams
Related Investment U Articles:
- Making Time and Fear Pay
- A Bearish Case for November 2011
- The VIX Volatility Indicator: How to Gauge Future Market Behavior
- The VIX Indicator: Watch This Index to Gauge the Market’s Mood… And When to Profit
- U.S. Debt Downgrade Impacts Stocks More Than Debt
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In addition to once being a full-time trader of equities and equity derivatives, Robert Williams has served as the lead financial analyst for a Forbes top-50 private corporation and an analyst for the endowment of a major academic institution. He's also been profiled in such books as Trade with Passion and Purpose and Alexander Green's The Secret of Shelter Island. 
