Don’t Nix the Vix

• kileyay
• June 11th, 2009

StockTwits chatter shows traders are watching the VIX. The fear index has tanked in recent months as stocks have recovered from March lows.

But it’s probably not yet time to nix the VIX. Just as the major indices have struggled to blow past the level around the 200 day moving average, the VIX has stubbornly refused to plummet south.

Referencing the recent erratic behavior of the index, @agwarner said early Thursday: “That oddly mediocre $VIX during yesterday’s market dip? Now kind of ugly $VIX on mediocre market lift.”

Some have seen the VIX under 30 as an opportunity to short weak rallies. But self-proclaimed bear Gio (or @thehawaiitrader) from iBankCoin warned of danger on his blog: “Still yet, it has been very tricky out there, and rookies should avoid the shorting game for now.  The VIX has not been giving clear signals either as it did before, since many of these dips were fought back with yet another mini-relief rally.”

Those reservations aside, the VIX is in a beautiful long-term downtrend. That the spring equity rebound has come with lower volatility is reason for cheer in the bull camp.

As StockTwits’ own @howardlindzon puts it, “The fear index – $VIX hit 90 plus in October. At 27 it’s still historically high, but what a diff.” @Dan_Passarelli echoes Lindzon: “$VIX approaching historically normal levels. Looks like volatility is coming back into line.”

@wallstCS likens the decline in the VIX to the markets taking a Xanax pill. Bullish traders should try not to drink champagne in celebration. The fundamentals are still pretty sour. Benzodiazepine drugs tend to have untoward effects when mixed with alcohol.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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