“When VIX is low, it’s time to go.”
VIX, the CBOE S&P 500 Volatility Index, measures market expectations of S&P 500 stock index option prices over the next 30 days.
Also known as the “fear index,” it moves inversely to stock prices as volatility rises with falling stock prices and falls with rising stock prices.
This negative correlation is a key component of how VIX and volatility work, but today, VIX and stocks both climbed.
What this typically means is that options traders aren’t buying into the rising stock prices or the notion that they can go much higher and so are hedging their positions or taking outright positions betting that volatility is going to rise and stock prices are going to fall. Sometimes you see this just going into a weekend as investors want to protect themselves from a violent Monday morning open or weekend headline news, however, rising VIX and rising stock prices on the same day is a “caution light flashing” regarding the current health of the market.
VIX ETN Summary:
VelocityShares Daily 2x VIX Short TermETN (NYSEARCA:TVIX) +4.12%, designed to deliver 2X the daily return of the VIX index, is bouncing near major support levels and was recently closed to new investment, issuance of shares by Credit Suisse, the ETN’s issuing bank.
Bottom Line: With VIX trading below 20, extreme complacency and confidence is being exhibited by major players in the market. Coupled with extreme overbought levels on major indexes, this is a recipe for a major sell off as, typically, extreme low readings on the VIX precede major market corrections, as do overbought conditions. Put together, the probability of a major correction grows. As options traders say about the VIX and the stock market, “when it’s high, it’s time to buy, and when it’s low, it’s time to go.”