The Drop in the 'Fear Index' This Year: 34%
The VIX -- also known as the "fear index" -- recently dipped below 15 for the first time since 2007, barely half of where it was in March of last year and well beneath its historical average of about 21. Officially known as the Chicago Board of Options Exchange Volatility Index, the VIX gauges investor sentiment by measuring expectations of near-term stock-market volatility. The higher the index, generally speaking, the greater the skittishness in the market. With the sovereign-debt situation in Europe seemingly stabilizing and a slew of positive economic statistics in the U.S., the low VIX number indicates that investor worry about a repeat of the 2008 financial crisis has waned.
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Why It Matters
While low volatility and positive investor sentiment seem to be good news for investors, those who follow Warren Buffett's advice to "be fearful when others are greedy and greedy when others are fearful" will likely view it as a sign of danger. After all, the VIX was around 10 in early 2007 -- near its all-time low -- right before the sub-prime crisis erupted, threw financial markets into upheaval and drove stock markets into the dirt. That crisis sent the VIX above 80 for the first time. The counter-indicator has worked the other way around, too: In the 12 months after the VIX hit that all-time high in November 2008, the S&P 500 index returned almost 50 percent.
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What It Means for Your Portfolio
Not everybody thinks a low VIX reading is a warning sign. Bill Luby, editor of a newsletter called "VIX and More," wrote recently that the index, down 34 percent since January, may stay near its current level for the foreseeable future. "At some point," he says, "investors need to come to terms with the reality of a VIX of 15." What might the reality of a VIX around 15 imply? That the next few years may resemble the 1990s, when a low VIX level in the early part of the decade preceded a massive bull market. There may be little to fear, in other words, least of all the fear index itself.
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