Posted inAnalysis

ANALYSIS: Time to put your feet up as ‘fear index’ drops to lows?

With gun turrets cranking upwards on the Korean Peninsula and threats of nuclear war emerging from Pyongyang, what was going on with markets?

The CBOE Volatility (VIX) index, known as the ‘fear index’, is an indicator of expected volatility in US stockmarkets.

A low VIX index number – on Monday the index closed on 10.11 points on Monday – indicates low expectations for price volatility.

A high number – the index reached 80.86 points on 20 November 2008 on one of the worst days of the financial crisis – indicates expectations for volatility ahead.

Many experts argue that low VIX numbers indicate at least a couple of weeks of positive stockmarkets lie ahead.

So can investors take stock and relax in the knowledge that volatility expectations are so low?

What the VIX strictly shows is the market’s expectation for volatility in the S&P 500 index of major US shares in the coming year, based on implied volatility in the pricing of options – especially the ‘put options’ used by investors to protect against losses.

The last time the VIX was lower than current levels came fleetingly in March 2014, but the last time it was lower for a meaningful amount of time was during the carefree months of November 2006 to February 2007.

The recent ultra-low VIX levels make some sense in light of the performance of benchmark-market indices lately.

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Part of the Mark Allen Group.