The stock market is a great barometer for measuring both fear (2008-2009 crash) and greed (technology market in the late 1990’s). One such stock market related tool that can be used to measure fear in the market is the Chicago Board Option Exchange Market Volatility Index (the VIX Index). This index measures the implied volatility of S&P 500 Index options. When fear is high, the VIX rises. When fear subsides, the VIX falls.
Below is a chart of the VIX index over the past four years. As you can see, volatility rises during periods of market uncertainty (peaking in October 2008, May 2010 and September 2011) as investors’ fears were heightened. Once that fear subsides, the index falls. The VIX currently is near the bottom end of its trading range over the last four years. What does that mean? It means that investors are not fearful about a stock market decline. We believe, on the other hand, there are several significant issues that could spark the VIX off its bottom. These sparks include rising interest rates, an Iran/Israel confrontation, the upcoming US elections and spiking oil prices to name a few. With 2008-2009 still fresh in investors’ psyche, we believe that a rise in volatility will occur over the next several months. Having an investment linked to the VIX is a prudent move to protect against any stock market losses when volatility spikes.
Your THOR Team