Wednesday, September 17, 2008

Fear and Large VIX Spikes

We are starting to finally see some real fear today, for the first time in a long time.

Regarding fear and large VIX spikes, my thinking is that the setup for a big VIX spike comes only after market participants begin to believe that a bottom is in and a sharp move downward suddenly causes them to change their mind. The mind set switches from something like "it's finally safe to be long again" to something along the lines of "oh no, this is much worse than I though...and I am caught on the wrong side of it."

Part of the fear factor is the fear that something unknown and/or much larger than expected is at work.

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