Thomas, re. interpreting VIX, there was a nice article in the Options column of the 12/28 Barrons that reviewed the VIX for 1998, along with the stock market.
It says that low VIX values indicate a lack of fear, while a high VIX indicates panic.
I constructed the following two charts to see for myself what happened.
tscn.com
tscn.com
Sorry that I haven't inverted the VIX scale.
The VIX dropped really low, into the low 20s and high teens, Jan. through March. This 'indicated' a correction. Which eventually happened to small caps in April. But not much happened to the big caps. Moreover, if you got out in January, you would have missed a lot. Even if you got out in March. So this did not prove to be that good an indicator, by itself.
It got even lower in July, to about 17, and this did mark the peak for big caps. This would have been a good time to sell. However, I can't tell much difference from the March and July indications, and only the July indication was very good.
Then in the October 8 panic, it closed at 52.l, which is an exceptionally high level, much higher than the levels of 30 - 40 normally associated with a panic, according to Barrons. (This level of an implied volatility indicates that investors assumed that the big caps would with drop or go up by 50% within a year.) This proved to be a fine buying indicator.
So what I wonder is this:
Is the VIX a better indicator of when to buy, during a panic, than it is of when to sell during times of euphoria? |
