What the Vix Tells Us About Fear, Greed and the Madness of Trying to Time the Market
The Vix, or the CBOE Volatility Index, measures the implied volatility of S&P 500 options and is considered a good measure of investors' fear. In theory, when the Vix is high, it means investors think the market's risky and likely to make a big move in either direction. When the Vix is low, investors aren't worried about a big move.
This month, the S&P closed over 1,400 for the first time in three months. But investors don't seem concerned about a pullback. Last week the Vix dipped below 14 for the first time since June 2007.
That’s quite a fall from its peak of almost 80 back at the height of the credit crisis.
Some folks over at the Wall Street Journal find this “perplexing,” pointing out that Europe is still a basket case, and we don’t know who will be running the United States as of next January. The fiscal cliff could also rock markets.
There’s an argument to be made here that most of the market is at the beach, sitting under an umbrella and reading Fifty Shades of Grey -- not worrying that current events could shake the market in the near-term.
If you are more scared than the market, you might consider this a good time to buy low by snapping up an exchange-traded product that tracks Vix futures contracts. The largest such product is the iPath S&P 500 VIX Short-Term Futures exchange-traded note (VXX). You can do so to speculate or to buy insurance on a potential market dive.
But buyer beware: As the Journal points out in a different Vix article, in the past 22 years, the Vix hit an annual low in August only once, but it hit its yearly low between November and January 13 times.
Also, you can’t buy and hold this ETN, hoping to wait it out. The costs of rolling over futures positions will eat up all your returns, as is explained here. You can lose money on this trade when investors are predicting that Vix futures will trade higher down the line, which they are. And Barron’s notes that what really matters is the Vix futures price, not the Vix itself.
Basically, any trade around the Vix is a short-term bet that has you competing against volatility experts (assuming you’re not one). It’s hard to time the market. It’s particularly hard to time this one.
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