Concerned man reading stocks
If you're contrarian by nature, the CBOE volatilty index's slide to a five-year low on Tuesday might look like a sign that the stock market is about to get rough. The VIX, as it is known, is often referred to as a fear gauge, rising with investor anxieties and subsiding during complacency.
Right now, it is flashing complacency: It slid to about 14 on Tuesday, down from 48 as recently as October when nerves were frayed over Europe's financial health. Although it has risen on Wednesday, the VIX is still below 16 and hardly reflecting any real concerns among investors. While that might sound okay, some contrarians feel that complacency is the prelude to panic.
However, two observers pointed out that a low VIX doesn't necessarily mean that the stock market's recent winning streak is about to hit a wall. Bill Luby, who writes the VIX and More blog, compared the current three-year-old bull market with the one that began in 2002 and found that current one has actually seen VIX levels remain stubbornly high.
In the case of the 2002 bull market, the VIX began at a level of about 42 and quickly fell. It spent a lot of time in the 10 to 13 range, with an average of 15.3 over the first three years of the bull market.
In the case of the bull market that began in 2009, the VIX started at 49, with only very rare dips to 15. Over the course of the past three years, the VIX has averaged about 22.8.
"Of course not all bull markets are the same (and there are many that will not concede that the current rally is a bone fide bull market) and every wall of worry is made of different types of stones, but at some point investors need to come to terms with the reality of a VIX of 15, particularly when we are looking at realized volatility that has been sub-10 for the last two months," Mr. Luby said.
Bespoke Investment Group has weighed in on the VIX as well. Similarly, it argued that a dip below 15 is not a warning sign for the stock market. Bespoke took its analysis back to 1990 and found that the VIX could hover at very low levels for a very long time: The index was mostly below 15 from mid-1992 through 1996, as well as from mid-2004 until early 2007.
"During these time periods, the S&P 500 experienced huge gains," Bespoke said on its blog. "A VIX at 15 really isn't that low based on historical standards either. Since 1990, the median daily close of the VIX has been 19, and during the two periods mentioned above, the median was 13."
David Berman