Does Record Low VIX Imply Investors Lost Caution?

As stated by Investopedia, VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. As relayed by S&P 500, it is the main yardstick by which market expectations of near volatility are measured. It is a computed index that uses the price of options instead of stock that estimates its volatility between the current dates up to the option’s expiry date.

Since its introduction in 1993, it is considered by many as the investor fear gauge, since it reflects the attitude or sentiment of investors towards events – either in the political or economic arena – that might affect the volatility of the market. Therefore, it is by far the best measure available.

There were quite a few investors who expressed interest in derivative financial instruments linked to the near-term market’s volatility. Hence, VIX options were introduced in 2004, and VIX futures were introduced in 2006.

VIX rests near its lowest levels Year-to-date for the last couple of weeks. This has brought some attention on whether or not the market is taking current events as calmly or as seriously, as it is. VIX hits a 10 year- low and it was welcomed with a mixed reaction from various economists, market strategists, investment bankers and investors themselves.

Some see this as a good sign, as economy seems to be stable across the world. But some are being wary on its effect in the long run, as Baxter said that having a low VIX, doesn’t mean that the market is performing well; neither does it mean that there is bound to be a crisis.

It is also possible that low interest rates around the world have misleadingly changed the markets. The reaction of the market towards what is happening can either be a favour to someone or is against the portfolio of another.

The effect varies as well on what kind of investors are out there, whether they are long-term or short-term. For short-term investors, the calmness of the market might be a good indicator for them to buy and sell stocks as its effect might boost the share prices.

On the other hand, these effects are being shrugged off the shoulder by long-term investors, as they know markets at any time might change in a blink of an eye. Though, they need to be cautious that these kind of events should not take long because this means that people are either being too complacent with what is happening and do not really care at all.

A steady market usually signals investors that economy as a whole is good, hence investing is encouraged in various portfolios. This can also attract foreign stakeholders to venture on business in our respective country. In return, this will produce employment for the people and will be an indication that our leaders know what they are doing.

On the other hand, a calm market might signal that something awaits investors and may possibly cause the market to crash as seen before in 1993, when VIX was low it preceded a 7% fall in the S&P 500.

With this, more investors will probably play in the market as some have this motto in their stock market venture – “buy when everyone is selling and sell when everyone is buying”. Financiers might either back out of their investment or push through if they see some benefits that might offset their cash outflow.

But with everything that is taking place, it pays to be aware of what is happening in our surroundings. Be updated with news especially the business section, and conduct your own research as you can find helpful materials over the internet.

Why? Because the most important part of the equation is that traders are educated and understand what they are getting themselves into.

A stable market can either entice investors or not. What is important is at the end of the day, being a risk taker, one should at all times be vigilant and updated on what is happening, may it be related to politics or economics, in general.

Always keep in mind that these events might affect the status of the market at an instant. Hence, this may result to people being frantic, simply because they have not been resourceful enough to know that these events are just episodes in one whole market cycle.