This year, except for a blunder in mid-March, after the devastating earthquake and the tsunami that followed in the Japan, the market has been on a relatively stable upward trend. So far this year, the & S P 500 has returned about 7 percent and the Dow Jones Industrial Average is almost 9 per cent. It is likely a reason many investors became complacent, reflected in one of the most closely monitored market indicators, the Chicago Board Options Exchange Volatility Index, or VIX for short.
The VIX uses the prices of options to measure volatility expected in the & S P 500 over a period of 30 days. It is often referred as the "fear gauge" because it measures investors how fearful or complacent are at any time. Professional money managers use often the VIX as a bulwark against the volatility because the VIX generally moves in the opposite direction of the & S P 500. Investors can follow the VIX on the Chicago Board Options Exchange Web site.
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This year, the VIX reached approximately 31 March after the earthquake in the Japan, but recently hit lows not seen since the last in mid-2007 bull market. The VIX closed 14,69 on 21 April, the lowest level since July 2007, according to TrimTabs investment research. Some experts say that the low number indicates that investors have become too complacent in a market poses many challenges, including high oil prices, problems in the Middle East and growing inflation concerns in the world.
"Almost every day, the market has moved, and it is very easy Lounger this complacency, says Harry Rady, CEO of Rady Asset Management, an investment management company based in San Diego, California." "" "But it is the time when you want to your guard, because the market has a way of chewing investors and spitting them and when they have been lulled to sleep."
Rady explains options labor are currently good markets, so that investors should take advantage. "I would say that the risks and opportunities of geopolitical shocks are significantly higher than in 2007," he said. Therefore, it anticipates an increase the VIX in the near future. It uses negotiated notes, including iPath S & P 500 VIX short-term Futures (VXX symbol), to invest in the movements of the VIX. This note negotiated, which is a complex debt obligation which trades as a fund negotiated, follows the S & P 500 VIX short term to term Total Return Index. It usually goes up or down about half as much as the VIX over a given period of time, said Rady.
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It is important to read the VIX numbers in context. Ryan Detrick, senior technical strategist for investment of Schaeffer, said during the last market bull, which lasted from approximately mid-2004 through mid-2007, that the trended VIX of the order of 10 to 15. "During the last bull market we saw, a VIX of 15 was indeed high," he said. Detrick said he was bullish currently on the market and expected the VIX continue to closer to 10.
While it may be useful to follow the VIX index to obtain a reading at the level of fear in the markets, there may be limited appeal to individual investors. To begin, experts agree that invest directly in the VIX through notes traded is only for more experienced investors. (Currently, there is no negotiated funds that invest directly in the VIX.) "Any way you slice it, this is not a security which can be purchased and ranger," said Rady. "It has to be exchanged."
Christian Magoon, CEO of active management consultant Magoon Capital, argues that investors benefit at the time of chaos in the markets. "If you look at the history global markets equity, there has been of extreme events, be it a 9 / 11 or Japanese predatory... but the market eventually always retrieves", he said. Spike in the VIX are generally of short duration, and they would generally affect your investments long-term.
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Nevertheless, it may be useful for investors to follow movements in the VIX because they can be a contrarian indicator. Magoon, said investors should use the VIX as meteorologists use a barometer to predict the weather. "It is one of the vital signs of the market gives you a glance in the psychology of the market," he said.
Investors can follow the VIX just as they can follow investigation investor sentiment, such as the American Association of individual investors releases each week. When the VIX is low compared to historical standards, it may be a warning sign that a liquidation is close, but most experts say it's probably not in your best interest to try to time these spikes.
Twitter: @ benbaden
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