This is a measure of the premium investors are willing to pay to purchase options on the S&P 500 index for protection against a market fall.
We call the VIX the ‘fear gauge’. That’s because when the VIX rises, it shows that investors are growing more fearful of a potential downside move in the market. They are prepared to pay more to protect themselves via ‘put options’ on the index. You see, put options rise in value as the index falls.
Meanwhile, when the VIX falls, that’s a sign that investors are more bullish. They are not prepared to pay for protection as they believe stocks will go up.
You can track the VIX - or the mood of investors - by looking at a chart. Here’s what the VIX is doing right now:
Fear is ebbing away from the markets... but what happens next?
Source: Stockcharts.com
The down trending black line shows that fear has been dropping away... ever since November last year. But it’s not been a smooth ride. I’ve circled in pink a few of the times when investors have panicked about the market... and the VIX has spiked.
Still, the trend is down. Fear has been ebbing away.
But the final blue circle hints that investors are still not totally comfortable. When the stock market fell at the start of this week, the VIX spiked again, from 28 to 33.
The key levels to look at are 30 and 40, where the horizontal lines are marked. If the VIX holds above 30 and moves towards 40, then expect stock markets to be falling.
If it breaks above 40, then we’re looking at a full scale rout.
Editor’s note: In one of his boldest and most important pieces of analysis yet, Theo Casey is predicting that the markets could fall further in the coming months. He’s found a unique way to play this - by "buying the fear index". You can access his recommendation right now by checking out The Fleet Street Letter.
Note: Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary.
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