The VIX indicator has become a popular gauge of investor fear and complacency. Using a weighted blend of various S&P index options, the VIX attempts to estimate the implied volatility for the S&P 500 over the next 30 days.
What is the VIX telling us right now?
During late 2009, the VIX index traded around 24, which isn’t far away from its 52-week low of 20.10. This likely indicates that investors have become over-optimistic about future stock prices. A low VIX could also be interpreted as a sign that investors aren’t fearful about a huge swing in stock prices. Conversely, an elevated VIX, as we saw last year, could be viewed as a sign that investors are overly pessimistic.
The VIX concept was first introduced in a research paper by Professor Robert E. Whaley at Duke University.
The fact that riskier assets have handedly outperformed lower risk assets since the market’s lows in March 2009 is quite telling. It indicates an increased appetite for risk-taking by the crowd.