The VIX, the CBOE Volatility Index, also known as the fear indicator, uses the implied volatility of S&P 500 index options and is an index of the market’s forward looking view of volatility for the next 30 days.

This indicator is widely viewed as a way to measure market risk and forecast future movements.  Some observers say that when the VIX is low, as it is now, that market risk is low and prices are likely to trend higher.  This camp also says that when the VIX is high, lower prices are ahead as fear is the dominating force in the market.

Contrarians say to “sell the greed, buy the fear” and so when the VIX is low, as it is now, contrarians would be anticipating declines in prices ahead and when it’s high, they would be expecting a reversion to the mean and lower prices ahead.

If you’re interested in trading the VIX, iPath offers an ETN that tracks this index.

 

Its symbol is (NYSE: VXX) and from the chart above you can see that it’s widely traded and has been in a steady downtrend since late last year with the exception of the short correction in early 2010.

 

And here’s a chart of the VIX, itself, with a 50 and 200 Day Simple Moving Average superimposed over it.  You can see that the index is in a sustained downtrend, although the MACD is recently pointing higher.

Advocates of low VIX/higher prices would say that prices will rise because the VIX is low while contrarians will say that with the price below the 50 and 200 Day Moving Average, there’s a good chance of higher prices ahead.

In my view, the best use of the VIX is to view it as not being “high” or “low” but rather what its trend is.  A lower trending VIX seems to indicate higher prices over time as fear subsides while a higher trending VIX indicates rising fear and perhaps lower prices ahead.  In any case, like with any technical indicator, the VIX should be used in concert with other indicators to confirm a suspected trend or change in direction.  Right now, the VIX seems to be putting in a bottom and is much oversold and so possibly a turn in the “fear” index and potentially higher volatility lie somewhere in our future.

There is a lot of research available on the VIX and if you’re interested in trading this vehicle, the ETN from iPath (NYSE: VXX)  is a simple way to do it.

Written by John Nyaradi, Publisher of Wall Street Sector Selector  

John Nyaradi is Publisher of Wall Street Sector Selector and Senior Vice President of Private Client Services for ProfitScore Capital Management, Inc.

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Here are some details on the iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX):

The investment seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.

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