The Big Question for the VIX

There are a lot of important questions about the markets that are being hotly debated as I write this. These include:

• Are we in a recession?
• Will crude oil break 150 soon?
• How long will it be until the housing market finally hits bottom?
• Can the indices take out their 200 day SMAs?
• Why is the VIX still under 20?

OK, so I was kidding about the last one. Judging by the number of visitors this blog gets, there is a fair amount of interest (about five times as much as there was a year ago) in the nanosubject known as the VIX.

Condor Options, a site that is part of my regular reading, wonders if the VIX phenomenon has jumped the shark. Drawing upon the latest from Steven Sears, Don’t Read too Much Into a Rising VIX, my avian friends opine (in Has the VIX Jumped the Shark) that “the VIX has definitely received too much attention of late, and is being asked to perform too many roles - market timer, sentiment indicator, and even trading vehicle.”

The gist of the Condor Options argument comes a little later:

“…it’s getting harder and harder to find a source whose daily market commentary doesn’t feature at least a casual nod to VIX action, and more importantly, those passing references almost always describe it one-dimensionally as ‘the fear index.’”

I was debating whether to weigh in on some of the particulars of the Condor Options article when another prominent blogger who bears more than a passing resemblance to Henry Winkler picked up on the VIX theme and added:

“The VIX is just one tool in the shed, and a very imperfect one. It is an estimate, and as such, there is a boatful of noise in the number any time you look at it. At the end of the day, it tends to confirm something you already knew. Back in January and March the VIX spiked as the market got plowed and peaked on those big down gap days. Guess what, emotions got extreme.”

Adam (of Daily Options Report fame) also offered some good advice to VIX watchers. “Going forward, we should forget about the blips, myself included…[a]nd we should concentrate on looking for divergences.”

Condor Options and Adam certainly make some excellent points. Regarding the larger question of whether or not the VIX has jumped the shark, my answer is that when I started a blog about the VIX with a tongue-in-cheek tagline of “Your One Stop VIX-Centric View of the Universe…” some seventeen months ago, the water skis were already passing over the dorsal fin.

With respect to the ‘fear index’ label, divergence analysis, and several other specific points about the VIX, I will save these subjects for more detailed treatment at a later date.