It seems to me that the global stock markets are a bit nervous these days. Japan’s Nikkei 225 had its first 6% daily loss in its 63-year history. In fact, this happened not once, but twice this year. China’s GDP has slowed to 7.7% and its stock market has declined sharply. Europe is still in recession and the U.S. is trying to recover, but is still muddling along with GDP at 1.8%. Despite a weak economy, the U.S. stock market continues to trend higher and risk seems to be contained, at least for the moment.
Risk, as measured by the CBOE Volatility Index, a.k.a. the VIX, is an indication of the level of risk present in the U.S. stock market. From January 2007 until the present time, it has averaged 23.6. On November 20, 2008, the VIX peaked at 80.9, the exact day the S&P 500 reached a temporary bottom of 752.40. I say temporary because it hit its post-crisis low of 676.50 on March 9, 2009.
In the past three years the VIX has had three major spikes. The first was on May 20, 2010, when it reached 45.8; the second was on August 8, 2011, when it hit 48.0, while the third was on October 11, 2011, when it topped 45.5. Each time, the stock market was falling. In fact, the correlation between the VIX and the S&P 500 for the period January 5, 2004 until the present is -0.59, indicating a strong negative correlation. Recently the VIX rose to 20.5, but has fallen back to 16.9 as of June 27th. Therefore, for now at least, it appears to be calm again.