Friday, August 17, 2012

The VIX Flashes a Warning

The VIX index of options volatility is a widely watched measure of stock market sentiment.  High levels of the VIX--generally greater than 30--have indicated high anxiety or pessimism among investors.  Such high levels of the VIX have been excellent signals to buy stocks, as major market lows have been associated with high VIX levels.

The reverse--low levels of the VIX--has been associated with low levels of anxiety among investors, or even complacency.  Low levels of the VIX  would seem to flash signals to sell stocks.  However, the sell signal of a low VIX has not been as clearly reliable as the buy signal of a high VIX level.  Yet, stock market gains have historically been minimal--or slightly negative--when the VIX index is at low levels, even higher than its current level of 14.

The VIX index is now the lowest it has been since 2007, which was a major top in the stock market.  Though the S & P 500 has risen about 3% since my recent advice to raise cash (and it could well move higher still), I think the current level of the VIX and the complacency it reflects strengthen the argument for caution.

Steve Lehman

S & P 500: 1415

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