Volatile markets are pushing the VIX – the so-called "Fear Index" – to its highest level in more than a year. And, January's 4.4 million contracts on the VIX was the highest volume it ever had.
The Chicago Board Options Exchange Market Volatility Index ("the VIX") measures the market's expectations of volatility for the benchmark S&P 500 index over the next 30 days. It's quoted on an annualized basis. With the index closing at 19.11 on Tuesday, that means there's an expectation of a 68% chance that the market will swing up or down 19% on an annualized basis. However, because people oddly like to look at the down part, it's nicknamed the "Fear Index".
Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, doesn't believe the VIX is in panic mode at the moment.
"I think it was Jay-Z who said, 'I've got 99 problems but the VIX ain't one'," says Ross, mistakenly quoting Beyonce's husband. "The VIX has little in terms of predictive ability. It's really like getting the weather forecast after you've already stepped outside – stocks go down, people get nervous, the VIX goes up."
Ross notes that the VIX was near its current levels a couple of times in last year. That corresponded to a 6.7% drop in June and a 5% drop in October in the S&P 500, and yet the market still ended 2013 up more than 29%. The decline from recent peaks in the S&P 500 has been 6%, which Ross notes is the same level of magnitude that occurred the two other times the VIX strayed above 20 in the past several months.
To put recent moves in perspective, Ross highlights some of the higher points the index has seen over the past decade. The current trading range for the VIX is much lower than they were during major crises.
"We've been as high as 100 at the height of the financial crisis," says Ross. "Then we had those twin peaks (in the VIX) back in '10 and '11 right around the 50 level. Those correspond with that 'flash crash' and 'PIGS crisis' over in Europe."
"Keep in mind we've seen multi-year periods of very low volatility in the VIX so this is not unusual," says Ross of the current run-up in the VIX. "But, on the same token, we can't rule out a further spike as we've seen in the past."
However, Ross isn't particularly worried about the market suffering a major decline from here.
"I like stocks here on the pullback," says Ross. "I'm not overly concerned and I'm not letting the VIX throw me off my game."
But, should investors worry about the markets from a fundamental perspective?
CNBC contributor Gina Sanchez gives her take on what the VIX means for the overall market. To hear her take – and to see Ross' charts on the VIX and drops in the market – watch the video above.
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