Read It Here First: VIX Says No Panic — Yet

On Monday, we showed a one year chart of the VIX versus SPX. We noted that the VIX had stayed
relatively modest, implying that a tradable bottom had not yet been made. On Tuesday, we noted the longer term, 10 Year VIX versus SPX.   

Today, we see both the WSJ and Bloomberg observing the same thing:


It felt like a panic. As the Dow Jones Industrial Average tumbled to a 2008 low, spooked investors flocked to the relative shelter of Treasury bonds. Gold, another place where investors search for safety, also jumped in price. In all, the moves were reminiscent of wild selloffs in January and March.

But something’s different this time. A key panic gauge is still relatively cool: the Chicago Board Options Exchange’s volatility index, also known as the VIX. This is a measure of how much investors are willing to pay for stock options, which they can use as protection in times of uncertainty. It tends to rise in worrisome times.

The VIX did jump Thursday to 23.93, a one-day gain of 13%. When stocks were selling off in January and March, the VIX went even higher — closing above 30 each time.


The most-watched gauge of price swings in U.S. equities indicates stocks have further to fall after the Dow Jones Industrial Average declined to the lowest level since September 2006.

The Chicago Board Options Exchange Volatility Index, or VIX, rose 13 percent to 23.93 yesterday, leaving it 26 percent below the 2008 high. The Dow is poised for the worst June since the Great Depression after record oil prices and credit-market writedowns sent the average to its biggest drop in three weeks…

The volatility index, which traders sometimes use to forecast price changes in the Standard & Poor’s 500 Index, closed above 30 for the first time this year on Jan. 22 after stocks retreated to a 16-month low. The VIX reached a five-year high of 32.24 on March 17 when the S&P 500 traded at its lowest level of 2008, the day after the Federal Reserve led a bailout of Bear Stearns Cos.

The VIX is derived from the cost of options used to protect against declines in the S&P 500 and usually increases when stocks slip. Its climb above 30 in January and March marked bottoms for the benchmark index for American equities and preceded rallies of 3.3 percent and 7 percent in the following months.


VIX Picks Up But Not to Level Of Stocks’ Licks
Mark Ggongloff
WSJ, June 27, 2008; Page C1

VIX 26% Below 2008 High Points to U.S. Stocks Drop

Elizabeth Stanton and Jeff Kearns
Bloomberg, June 27 2008

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What's been said:

Discussions found on the web:
  1. Chief Tomahawk commented on Jun 27

    Bloomberg TV just had a good interview on the VIX. The guest said the gauge doesn’t have to move for the market to continue to sell off. Rather, the VIX is more of a panic rush.

    I know most folks know the latter, but the former (ie a slow, continuous melt) I wasn’t aware of.

  2. Ben commented on Jun 27

    Is VIX or VXN a reliable indicator since everybody talks about it? I have a serious reserve on these indicators.

  3. ReturnFreeRisk commented on Jun 27

    Reuters is reporting that Elizabeth Duke, a Bush nominee has been confirmed to the Fed Board of Governors.

    I can not believe this person with no qualifications (DRAMA MAJOR!! wtf!) get confirmed to the FED. what does she know about monetary policy. We are so screwed.

    This from her stellar bio:

    Duke attended North Carolina State University, then moved over to the University of North Carolina, and switched her major to drama. After graduating, she moved back to Virginia Beach, where she had grown up, found an acting job in a dinner theater, and waited tables on weekends. Not exactly instant stardom.
    She should at least have a real day job while doing the theater thing, she says. Her first stop was a dry cleaner who turned her down. Choice number two was a bank, where she found a job as a part-time teller.

  4. wedwards commented on Jun 27

    The problem with this observation is that EVERYBODY has been talking about it! In addition to all of the press, all of the talk on CNBC Squawk Box this morning was about this.

    Given that now everybody is expecting another spike to be a tradeable low, the only thing that I know for sure is that it will not unfold the way every expects. Either the VIX does not increase and the markets do whatever they want or the next downturn will be so horribly bad that those trying to catch the knife will be the source of blood running in the streets!

  5. smart commented on Jun 27

    heard today is going to reverse sentiment. One thing is clear: You are not going to wake up tomorrow and find that

    oil prices have dropped 20 or 30 dollars.”

    will the market crash?

    The Saudis have already said they believe current demand is being met, despite the high prices — suggesting that

    high prices alone might not be enough to warrant the increase in supply.

  6. DL commented on Jun 27

    During 2001-2002, there were at least three spikes in the VIX to the 40-45 range.

    We haven’t gotten to 40 even once in the last 12 months. This isn’t over yet.

  7. Fifi commented on Jun 27

    Could it be that investors don’t trust options and don’t even bother to take that stop on the way out?

  8. Ironman commented on Jun 27

    The lack of volatility in the market is consistent with my thinking (see comment posted at Jun 26, 2008 10:31:28 PM) – most of the carnage is concentrated in a few sectors, while most other companies are in fairly decent shape.

    What I would anticipate seeing is the market ratcheting down another notch, while still progressing in a orderly manner – similar to what the market did during and following the disruptive event of January 2008. We’ll know enough by October to see if I’m right.

  9. Northern Observer commented on Jun 27

    Wil l Obama Lose?
    Posted by: smart | Jun 27, 2008 4:14:46 PM

    This has been another edition of simple answers to simple questions.

  10. Stringm commented on Jun 27

    Everyone is already short, no need for protection!

  11. Automated Robot commented on Jun 27

    barring Republican chicanery, as in last two presidential elections

    McCain will steal it fair and square
    We look forward to you dems “taking it to the streets” in the aftermath

  12. Jan commented on Jun 27

    Re: Elizabeth Duke…..does she also go by the nickname of “Daisy”? ;-)


  13. Jay commented on Jun 27

    Oil approaching 160 will generate the panic. I like VIX 40+ for a bottom. But you have to look at it in context when it occurs.

  14. Jim commented on Jun 27

    Oil is going to correct down to 120 or so Mid July, sparking a relief rally. August/September begins the next leg down to 10k IMHO. A gulf hurricane and 200 oil do the trick.

  15. jopo commented on Jun 28

    you almost get the feeling from this that the general perception of the market at this point is that of the little boy that cried wolf. but there may be other factors that should be considered. one would be the rise of the of alternative forms of protection such as etfs that allow you to short the market (i would be curious to know what percentage of the record short interest can be attributed to these funds if anyone knows). another may be the result of the deleveraging that we are experiencing at the moment. options have always been one of the most highly levered areas of the market, allowing the hedge funds, et al to make huge bets with very little margin. if that leverage is withdrawn, than so to will the size of the orders that are the real drivers of options volatility. a third may be the elimination of the uptick rule, the relative ease of shorting providing another alternative to buying options (protection). as barry pointed out in a recent post the real volatility may have shifted to the upside. which leads to the final possible factor. market participants may have resigned themselves to the fact that we are already in a bear market ( officially or not). spikes in the vix typically occur during times of sharp unexpected sell-offs, periods of extreme uncertainty in the market, if participants are no longer uncertain of where the market is heading then any excess fear premium will fail to materialize, ultimately keeping a lid on the vix. these may all be contributing factors to a vix level lower than one would normally expect, but i suspect that the vix taken along with the relatively low put/call ratio is signalling a complacency in the market. the villagers are no longer heeding the cries of ‘wolf’. equities don’t typically bottom until everyone is either out or protected, and if the level of the vix is reflecting the latter, then we may still be in for a wild ride.

  16. me commented on Jun 28

    re: Daisy Duke the actress Fed Govenatrix

    They needed someone who could read lines a lot better than these other guys.

    Bernanke: Does everyone agree?

    Duke (furrows brow): Yes, Ben, I do. I really do. Pure genius Ben.

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