The VIX volatility index fell below 30 on Tuesday for the first time since mid-September, suggesting that investor anxiety over stock market volatility has fallen below a notable threshold.
As recently as November, the VIX was in record territory above 80, when the S&P 500 was in freefall. It then bounced between 40 and 50 - which is also exceptionally high, based on history - from the start of the year until the end of March.
How low can the VIX go? That's a question Bill Luby addresses in his VIX and More blog . He finds it hard to believe that the VIX will fall below the 25-26 level, largely because he thinks that the current rally in stocks - which has eased anxieties over financial collapse and a global depression - is looking a little stretched.
He put the 25-level for the VIX in context: First, the historical average going back to 1990 is 20.12. Second, the mean average during 2008 - when it hit record highs - was 32.68. Third, for the five year period between 1998 and 2002, which included the demise of Long-Term Capital Management and the end of the dot-com bubble, the VIX averaged 25.27. Mr. Luby concludes that 25 is a low number for a volatile period.
"Even as fears dissipate, there is still uncertainty about the strength of the recovery in addition to the normal uncertainty about the direction of the economy and the markets that would be associated with a period of relative market calm," he said. "Historical volatility, therefore, should provide a volatility floor and with historical volatility currently unable to drop below the low to mid-20s, we should begin to see evidence of that volatility floor shortly."