Measuring Investor ‘fear’

  • Written by David
  • January 22, 2008 at 5:39 pm
  • 0

  • There are certainly many ways to measure such a statement, but one mathematical tool I have been using for years is the VIX index. Without a detailed mathematical explanation, the VIX index is widely interpreted as a gauge of ‘fear’ or ‘greed’ of the S&P 500 index.

    VIX is also known as a contraian indicator. As the VIX index goes higher, it is expressing more investor fear within the underlying index, the S&P 500 index. As fear grows, markets trend toward creating a market bottom. Conversely, as the VIX index goes lower in value, it implies greater investor complacency, or greed. This tends to indicate that the underlying S&P 500 index would be getting closer to setting a market high.

    Yahoo Finance is an easy place to view the VIX index. The VIX index is presently trading in the lower 30′s (31.01 close on 1/22/08). The historical highs have been in the mid 40′s set in the early 2000′s. As recently as January 2007, the VIX index was trading at 10 reflecting a very complacent market.

    How does this all translate today? VIX is not an exact tool, nor is it a tool of market timing. It simply helps to reflect investor sentiment. Today’s market action spoke loudly; investor sentiment is negative. Of course! There are many reasons for the market sentiment which I will not attempt to answer here.

    But do know that you now have a tool to help monitor and gauge such investor sentiment…

    be well

    btw… there is a companion index of volatility for the NASD index as well known as VXN.

 

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