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Inside the Market

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Volatility is down. Time to worry? Add to ...

Gosh, it seems like ages since the stock market last turned nasty, and this period of relative calm is reflected in the VIX - or Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation for volatility in the S&P 500 over the next 30 days. But is the calm about to break?

The VIX fell below 22 as of Thursday afternoon, a sharp decline from above 32 in mid-March when investors believed that the world's financial system was near collapse and major stock market indexes were falling fast. It is now at its lowest point of the year, meaning that those concerns appear to have largely passed, coinciding with fairly tame days for major indexes.

The index has been in an up-and-down mode since last summer when investors began to fret over the beginnings of the current credit crisis. Since then, the VIX has hit four peaks, each above 30, and then settled back into four valleys, ranging between 16 and 22. Right now, it's in a valley, which has some observers wondering whether another peak is on the way - with volatility translating into another downturn in the market.

"Right now, the VIX seems to be contained within 32 to the upside and 23 to the downside," said Cory Rosenbloom on his Afraid To Trade blog. "If this is correct, then the VIX has either broken slightly to the downside of the channel, or is set to reverse back to the upside."

There are a lot of "ifs" here, but his point is that a rising VIX index is usually correlated with declining stock prices, making the index's current low level a potential source of concern.

"What this means is, IF the VIX is testing the bottom of its trend channel, and IF the VIX reverses to the upside after testing this level, THEN we would expect to see higher volatility and (potentially) sharply lower U.S. index prices," Mr. Rosenbloom said.


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