Wednesday, October 21, 2009

VIX About To Breach The 20 Level After 287 Trading Days Above That

Why do we look at VIX indicator? As the market tanked, experts kept citing the VIX as a reflection of "risk aversion". Bespoke Group has written an interesting article as VIX is about to breach the 20 level - that is significant as the markets has never traded at 20 for 287 trading days. Is VIX as important when it is LOW? You bet your sweet ass it is. As volatility hit lows in February 2008 and again in October (the S&P 500 was breaching highs), and then in May and August of 2008. These were all market highs. Beware low volatility.

Bespoke Investment Group: The VIX volatility index slipped below 21 earlier today and currently stands at 21.15. This is the closest the VIX has gotten to 20 throughout the entire bull market, and marks a 75% decline from the closing high of 80.86 seen during the financial crisis.

The VIX has now been above 20 for 287 consecutive trading days, which is the longest streak since 1990 when our daily VIX data begins. In the bottom chart, we provide a historical look at the VIX along with all of its streaks of daily closings above 20. We've only seen two other periods where the VIX was above 20 for 200 straight trading days or more, and those ended at 239 days in June 1999, and 236 days in May 2003. In terms of market performance following these long periods of high volatility, the S&P 500 was on the verge of making a mutli-year peak when the VIX broke below 20 in 1999, but it did very well in the months and years following the drop below 20 in May 2003.



p/s photo: Jennylyn Mercado

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