Saturday, March 17, 2012

Determining market direction with VIX

VIX is a traditional symbol for a volatility index. It is a measured of the level of impled volatility, not a historical volatility, based on the S&P 500 market. This particular indicator is seen as a "investor fear gauge". In general, VIX starts to rise during times of financial distress (e.g we have seen VIX of 80 during the 2008 GFC and VIX of 45 during the recent Eurozone trouble) and lessens as investors become complacent.

Historically, this pattern in the relationship between the VIX and the behavior of the stock market, has repeated itself in bull and bear cycles across the years.For beginner investor, you may want to refer to this simple indicator before you decide to buy.



As you can see from the graph above, when the VIX has dropped to relatively low number of 20, a major sell-off will follow shortly after that. This means that should you buy when the VIX is low, your chances of buying the shares are not at its low. You will need to stomach each bad news with uncertainty. In my opinion, this is not absolutely with certain but it is a very good gauge especially for those entering the markets for the very first time.

With VIX at a low of 14+ today, I don't seem comfortable adding to my position, even if some stocks do look undervalued. With oil prices rising and uncertainty in the middle east, one incident can easily change the whole picture.

3 comments:

  1. the vix can be a very bad timing tool.

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  2. Yeap. Vix is used a a guage to determine the fear level in the market. With such a low value, it shows that people in the market are getting too complacent. Good to stay away when u are not comfortable. Vix can stay low for a period of time though. All the best in your investments!!

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  3. Drizzt: I think we can use the vix as simply one of a measure of a tool. Having said that, I agree that it can become a bad timing tool and one should not make decision to buy or sell purely based on that.

    Dave: Vix can remain low for a very long time..but no doubt in my lifetime i am going to at least see VIX go above 30 for at least one more time...hahaha. All the best with your property investment too.

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