Save the Cheerleader, Save the World: VIX Edition

Save the Cheerleader, Save the World: VIX Edition

My ongoing theme this year has been “A happy consumer, a happy economy”. I believe that more cheerleading needs to be done by global policy makers in order to remove the fear of the unknown. Until this is done, the economy will have a tough time moving up.

As this relates to the US stock market, a great indictor exists to help us gauge the emotional thinking of investors.

The current unknown fear is if Greek’s problems will spread through Europe and destabilize the global economy. Investors are worried that a Greek default will lead to major instability in Europe (and the Euro) and will cause another global meltdown, similar to what we saw in 2008.

One key area to watch will be the VIX level. For those who are not familiar with the VIX, it is an indicator typically referred to as the “fear indicator”. It measures the volatility in the market and helps us see what the rest of the market thinks about the future.

Investopedia explains VIX – CBOE Volatility Index
The first VIX, introduced by the CBOE in 1993, was a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later, it expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors’ expectations on future market volatility. VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.

Last year, the VIX reached a hefty reading above 48. Anything above 30 is typically consider bearish for the market. In 2008, during the worst of the market downturn,  the VIX spiked to a record level of 90.

In the beginning of September, as worries of a Greek meltdown increased, the VIX spiked up to 48 again, before moving back down. If investors become more fearful that Greek’s problems will spread globally, then we will see the VIX spike above 48 and to much higher levels – an indication that we are on the verge of a big global problem.

Investors will want to keep a close eye on the VIX level to see if market participants are panicking about Europe’s problems, or if they are just reallocating their portfolios to a less risky model.

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