Volatility: VIX Shows As Much Greed As It Does Fear
Bob Lang | Oct 22, 2017 01:46AM ET
Many call the VIX (volatility index) the 'fear gauge', but it is just as good at measuring greed. For years the VIX has been in a solid downtrend, this can be tracked from the peak in 2008 when the fear gauge reached the 90's. This indicator, created by Bob Whaley in the early 1990's had never reached that level, but some back-testing probably put the VIX at 150 during the crash in 1987 (this past week was the 30th anniversary of this 'momentous' event).
So, when the VIX is in a solid downtrend, what are we supposed to make of it? How do we respond and is it meaningful to take the other side of the trade? In my experience, long and drawn-out trends are difficult to fight and much easier to climb on board. Since this bull market renaissance started in 2009 we have seen our share of declines, but looking at the longer term trends those have been ideal buying opportunities.
Yet, we often hear about how too much complacency will kill a market uptrend, and it is best to be a contrarian when it comes to sentiment that is tilted. I would argue that price is the key indicator to follow at all times. Trying to decipher how people are thinking and feeling just based on this indicator is quite foolish. Maybe some short term gains can be had, but by and large the bulk of the gains since 2009 have been when dips are bought.
The bigger picture is to stay with the trend, and while we know at some point the rally will fizzle out, there will be plenty of clues to guide us out of the markets or over to the bearish side, and the VIX will be just one of those clues. Currently, unless and until volatility starts a new uptrend, the markets can continue to move higher
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