DOES THE VIX INDEX FORECAST ANYTHING?

The Marketwatch yesterday posted an article with this title “The father of the VIX.” I guess that is a good opportunity to talk a little bit more about the VIX fear gauge index.

The VIX is a mathematical equation derived from S&P500 options and traded on CBOE and a ticker for the Chicago Board Options Exchange Market Volatility Index. Mostly referred to as a fear index and represents the market's expectation of stock market volatility over the next 30 day. The idea of the VIX was first described by Menachem Brenner and Dan Galai in 1986. And, seven years later in 1993 the “the father of the VIX” Robert E. Whaley, a professor at Vanderbilt University developed the VIX for the Chicago Board Options Exchange (CBOE).

The VIX is generally called as an inverse indicator and the Trader’s Bible says the markets crash when the VIX is low. But, and here comes the big but. I have so many concerns about this preconception. As always on the market something works for a while after doesn’t work that is the same with the VIX too. If that would be true this year the market needed to go down because of the low VIX levels, but all US indices are at their historical highs. Just using your logic in this concept the markets should have been crashing every week for past couple years.

And here come the problems. Everyone and their grandmother know about the VIX now and watching it like a hawk. Secondly, if it would be so simple forecasting the crash everyone could make money. In my view the low level of VIX only show people are comfortable that nothing serious will happen in the next one month. That’s it nothing more, so it is more a sentiment indicator. And as we know the mass could be at most cases wrong. So, I have a bad news for VIX believers the VIX is not an indicator of anything having to do with forecast crashes.

Recently the VIX at historical law and many investors are worried about that VIX hitting multi-year lows. Should we be concerned? I don’t think so. As Robert E. Whaley said “I wouldn’t be worried about it.” The VIX could be lower than 10 or 11 in the market everything possible.

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