Bloomberg on VIX: The Importance of this Lagging Indicator

by: Paul Price March 24, 2008 | about stocks: DIA / QQQQ / SPY    

Paul Price

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Bloomberg News Service reported that through Wednesday, March 19th, the S&P 500 had moved up or down by > 1% on 28 trading days so far this year, or 52% of the time.

Thursday's big up-move made that number an even larger percentage.

Bloomberg noted that the 52% rate was the highest such reading since 1938. In 1938 the S&P 500 rose or fell during 57% of the trading days. The VIX index inception date was during 1928.

The VIX closed at a five-year high of 32.24 last Monday, March 17th. That was right after the catastrophic - more than (90%) - 'Fall of Bear Sterns'.

In 2002, when U.S. stocks hit bottom after collapsing from March through early October, 1% moves in the S&P 500 occurrred 50% of the time. In 2006 and 2007, these 1% moves happened on just 12% and 13% of all trading days respectively.

Think that VIX numbers should have no bearing on your investment decisions?

Simply ask yourself whether you would have been better off doing your major buying in late 2002 or during the 2006 - 2007 time frame.

VIX is a lagging indicator. High VIX numbers tell you people are scared because stocks have already gone way down. Low VIX numbers signal investor complacency because stocks have already steadily risen for long periods.

The times with 'perceived' high risk have almost always proven to be better buying opportunities than the times of 'no worries' and good news.

Which of those mindsets is applicable today? 'No worries' or 'perceived high risk'?

Act accordingly.

Disclosure: The author has no long or short position in VIX.

Related Articles

This article has 1 comment:

  •  
    Mar 24 08:23 AM
    I will tell you which is applicable, according to the VIX. It is that people are not worried enough. I'll start to think that there is a lot of worry in the markets when the VIX goes to the low thirties and stays there for an extended period of time.
    Reply | Link to Comment
More Comments on DIA ยป
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Paul Price

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Bonds
Dollar/Currencies
Earnings
Economy