The Cboe Volatility Index, more commonly known as the VIX, hit six-month lows on Friday dropping to 11.95 at one point during the session. The index, which is frequently referred to as Wall Street’s “fear index,” is often used as a measure of investors’ fear. In theory, the more it drops, the less anxiety investors have about the market.
The VIX’s fall came in conjunction with a rise in US stocks on Friday that took other indices such as the Dow, Nasdaq, and S&P 500 to near-record highs. The VIX measures the expectations investors have for volatility over the next 30-day period by using S&P 500 options. Over the long-run, its average level is around 19, so the levels it hit during Friday’s session are significantly lower than usual.
Few would likely have predicted that the index would be back at its lowest levels since early October 2018 only a few months after it spiked in December, hitting 36 at one point. With a hawkish Fed, interest rate hikes, and the infamous Christmas Eve Massacre investors found themselves on edge. But as equities took a sudden U-turn, so did the VIX.
But not everyone is convinced that these low levels of investor fear will last. According to Sven Heinrich, a market strategist, the VIX often acts like a coiled snake. Meaning after periods of volatility compression, it will likely pounce higher very suddenly.
Heinrich explained. “Volatility compression can extend as we’ve seen before, and this pattern can suggest prints in the 12 range being possible. But it also strongly suggests that the next big move in VIX is not lower, but rather a launch higher. A lot higher.”
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