Stock Ideas Investors Daily Edge The Ever Vexing VIX 
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By Dr. Russell McDougal Dear Reader, The U.S. dollar is “as good as gold,” right? Well, not exactly. Those days and decades are long gone. The U.S. remains in the midst of currency woes and a global credit crisis that refuses to go away. Let’s look into what was once the foundation for the buck - gold bricks in Ft. Knox, Kentucky. |
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| The Ever Vexing VIX |
| Wednesday, 25 June 2008 | ||||||||
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I received several emails about my observation on the VIX and how it doesn’t seem to be as useful a market timing tool as it once was. Most of the comments were positive, but several readers ask for some comparison analysis.
If there is an inverse correlation between the VIX and the "market" as you aver (and with which I agree) and IF that correlation has become weaker, then that change in correlation should be able to be shown and demonstrated. I don't have the knowledge of how to do that, but surely there is someone who knows how to write the code to demonstrate that in the early '90s the correlation was strong, and that now it is weak. It would be interesting to see the results of such a study. Thanks again for your thoughtful and profitable articles. Regards, Thanks for the kind comment Dan. I unfortunately do not have the technical aptitude to pull off a perfect correlation test, but I do have two charts to offer you. The two charts are performance charts of the VIX versus the S&P 500 and they are for the same timeframe, only seven years apart. If you look at the first chart, it is from March 1, 2001 to December 18, 2001. This was during the middle of a bear market and it includes the first week of trading after the attacks of September 11. Take note of how the VIX jumped 55 percent during that time period while the S&P dropped sharply. The second chart runs from March 1, 2007 to December 12, 2007. Each of the charts contains 200 days of information. The first ranges longer on the calendar because the market was closed for a week following the attacks.
On this chart, you will notice that the S&P is relatively stable with the index remaining in a fairly tight band with just a few months above the 10 percent mark and only a day or two below the zero line. Despite the apparent calm, the VIX saw tremendous jumps, twice rising as much as 95 percent from the beginning of the 200-day period and falling back to the zero line in between the two spikes.  Sorry Dan, this isn’t exactly what you asked for, but it certainly tells us something. The volatility on the Volatility Index has increased over the last seven years.
So the very index that was designed to help us measure volatility by measuring pricing on options has seen its value decline because of options. Very ironic, don’t you think. Good luck and good trading, Rick P.S. To let me know what you thought of today's article, send an e-mail to:
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