Is the Falling VIX a Bullish Indicator? Yes Says Jon Najarian
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Despite tumbling as much as 5% earlier today, the CBOE Volatility Index (^VIX) could be the most bullish indicator on the Street. Sometimes referred to as "the fear indicator," the VIX has been in a downward trend through most of December, dropping nearly 10% in the last two last two sessions, and currently inching below it's 200-day moving average of roughly 25.75.
Generally, the VIX gauges the magnitude of coming market fluctuations, what the Street calls implied volatility. The VIX is not only traded directly and serves as a baseline price for calculating other market entities (ie "boring" stock options trade at a lower vol than names subject to bigger daily swings). Typically a falling VIX means options traders expect lower volatility for the broader S&P 500 benchmark, suggesting higher stocks in the short-term.
Big market swings such as we've seen in December are "supposed" to lead to a higher VIX. The curious combination of big moves and shrinking VIX levels has some questioning whether or not it has any predictive value at all.
"I hear a lot of people saying that the VIX is broken, it's not a tell anymore," says Jon Najarian, co-founder of TradeMonster.com. "I say just the opposite, that this is the best reading we've ever seen out of the VIX because a week ago it was screaming from the rooftops that we'd being going down."
Getting a bit more advanced, Najarian says traders that aren't paying attention to VIX futures (VXX), are the ones that have been "unhappy and had their lunch handed to them." He suggests checking out the Chicago Futures Exchange website: www.cfe.cboe.com to track the data.
"Those VIX futures are reflecting lower and lower VIX… significantly under 29, pushing 27," says Najarian.
Bottom line: While Najarian says volatility softness more or less suggests a near-term rally for the broader market, it doesn't necessarily mean it's time to buy.
"In the VIX there's a lot of money that's saying the markets will not be moving as much as they were in September, October, and November," he explains. "It doesn't necessarily mean we have to rally, it just means the moves will be less exaggerated."
Less exaggerated price swings will hopefully lead to better investment decisions in the New Year.
