Following the VIX
The VIX is an index rarely mentioned in ordinary day to day news. The VIX represents volatility, or how quickly prices change in anything from stocks to commodities. The index is published by the Chicago Board Options Exchange to give a good idea of how stable the markets are in contrast to other time periods.
The VIX ranges from 0 to 45, 45 being the highest that the index has reached since its creation. The volatility index is based on S&P500 options statistics analyzing the price paid for options and the change in price over time.
The volatility index has been moving upward from its lows during the housing boom. The volatility index is a good way to gauge the amount of credit flowing through the financial markets. In times of easy, growing credit, the volatility index is usually low. A steady gain on the markets is hardly something to set off the volatility index.
Recently, worries about the subprime mortgage industry has sparked concerns on the overall markets sending prices every which way without a serious pattern. In times of recession, the VIX has been historically higher than times of prosperity. During the tech bubble burst the VIX was quoted as high as 45, today it sits at just 26.28. It might be interesting to note that the index has been on a steady incline ever since the housing market cooled off, almost a sure-sign of recession.
The volatility index doesn’t show much itself until compared to previous readings. We can infer from the difference in price that the market is in a downturn, much like what happened when the volatility index rose so much last time. The volatility index is an interesting tool to gauge market sentiment and comfort to determine when the best investment might be.