The so-called fear gauge for the stock market, the CBOE Volatility Index (VIX), closed trading on Wednesday up 54% from its recent intraday low on Sept. 19. The VIX captures options traders' expectations about stock market price swings over the next 30 days, and a rapid advance in the VIX signals falling stocks ahead, according to a technical analysis by Andrew Addison in Barron's.
Recent history bears this out. From Sept. 21 to Dec. 26, 2018, the S&P 500 Index fell by as much as 20.2%, based on intraday prices. During the same period the value of the VIX shot up by nearly 230%. The earlier 11.8% market drop from Jan. 26 to Feb. 9, 2018 came while the value of the VIX rose 270%. During the recent surge in the VIX from Sept. 19 to Oct. 2, 2019, the S&P 500 shed 4.4% of its value.
- A rising VIX normally accompanies falling stock prices.
- This has been the case in recent weeks.
- Technical analysis suggests yet higher values for the VIX ahead.
- Since early 2018, the VIX has been on an uptrend.
Significance For Investors
The VIX ended trading on Oct. 2 at a value of 20.56. The Dec. 26, 2018 intraday high was 36.20 and the Feb. 9, 2018 intraday high was 41.06. Since 2018, after each time that the VIX surged into the upper 20s and beyond, the subsequent declines have been successively smaller and shorter, leading to increasingly higher bottoms, the column observes.
"The VIX projects a test of major resistance in the upper-20’s before year-end," says Addison, who is is the author of THE INSTITUTIONAL VIEW, a research service that specializes in technical analysis. "Once the VIX has a weekly close above 32, then my work would confirm upside projections to 50-55," he continues. He sees additional stock market declines ahead if the VIX does indeed rise.
While the VIX is regarded as a fear gauge for the market, Investopedia has created its own measure of investor sentiment based on what topics currently are of most interest to our readers. The Investopedia Anxiety Index currently is registering a neutral level of concern among our readers overall, after considering their levels of interest about macroeconomic, securities markets, and credit markets topics.
ETFs and ETNs that are designed to rise in value as the VIX rises have become increasingly popular with investors who wish to hedge against a spike in volatility. The two largest are the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), with total assets of $1 billion, and the ProShares VIX Short-Term Futures ETF (XIVY), with assets of $340 million, per etfdb.com. However, these products tend to have high cost structures that make them generally unsuitable for long-term investors, as discussed in detail regarding the Velocity Shares Daily 2x VIX Short-Term ETN (TVIX).
The future direction of the VIX is likely to be heavily dependent on policy developments, such as the course of the protracted U.S.-China trade war. Elizabeth Skettino, a senior global strategist at Wells Fargo Investment Institute, has pointed out that risk-averse investors will find it cheaper to hedge before stocks begin a rapid decline. “You don’t want to buy the flood insurance after the flood comes,” as she told The Wall Street Journal earlier this year.