The VIX measures the volatility of index option prices listed on the CBOE. Like the put/call ratio, it is a measure of investor sentiment. In the rare cases when the VIX moves above 45, it reflects major angst in the market, indicating an advantageous buying juncture; At times when it drops beneath certain levels, it indicates complacency.
Yesterday, Gary B. Smith ran this graphic on RealMoney, and I agree with his perspective:
Source: Realmoney.com
The Volatility Index is often called the fear indicator; When investors are nervous, they often hedge their positions through option buying; When they are too complacent, they ignore hedging alternatives.
Click on chart for larger image . . . Source:Stockcharts.com
Look to buy peaks above 50; When the VIX drops below the 18-20 range, it suggests a complacent market due for a reversal.
URLs: Realmoney.com
http://www.thestreet.com/p//rmoney/techforumrm/10108780.html
Stockcharts.com
There is of course the problem of the Heisenberg Principle: The fact that everyone and their sister is watching the VIX alters the reliability of its signals.
Also, it’s quite possible that the ‘smart money’ recognizes that the market is ripe for a reversal, but they’re waiting for the market to confirm the VIX’s sell signal. Ironically, as the smart money waits, the market simply drifts higher.