Does it reliably indicate market direction?
I just want to add that the VIX is NOT a good forward indicator of market direction. The VIX itself is highly volalitile, in fact, much more volatile than the S&P 500, whose expected next 30-day volatility is measured by the VIX.
So just because the VIX shot up today, doesn't mean the market will crash soon. This has happened many times before in the past few months, and yet we made it all the way to here.
To quote directly from the Chicago Board Options Exchange, "The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility."
VIX tends to increase as markets fall, and decrease when markets rise. There is a very good reason why this is true (more on this below).
As every trader remembers, 2008 was a very volatile year for stock markets around the world, and the levels of implied volatility - as measured by VIX - increased dramatically as the market tumbled. A record closing high (at 81) was established during the worst of the market slide. That's why The VIX is referred to as "The Fear Index."
Today (October 30, 2009), the markets gave back all of yesterdays gains, with the Dow Jones Industrial Average falling 250 points. The VIX, went from 24.87 and close at $30.69, up 5.93 points or 23.95%.
Enclosed below is a link to the VIX (real-time quote) and the CBOE.
VIX does not indicate market direction, but rather, how much "confidence" do the investors have on the market by measuring the options on the stocks getting traded. if a lot of people are betting that market is going DOWN, VIX goes up, and vice versa. Of course the formula is a bit more complicated than that, but that's the gist of it.
---
Kasey C, PC guru since Apple II days
Error, no keyboard - press F1 to continue.