Get ready for a bit more volatility in the markets.
The CBOE Volatility Index (^VIX) has been trading above 20 for most of the new year. Until the huge spike this past August to as high as 53.29, the VIX spent the better part of three years below 20. On Monday, the VIX closed at 19.98.
Sometimes referred to the as the “Fear Index,” the VIX often moves in the opposite direction of the market in the short term, though it is technically a measure of the expected volatility in the S&P 500 (^GSPC) for the month ahead.
This may be the start of a new normal, according to Russell Rhoads, education director at the Chicago Board Options Exchange’s Options Institute.
“We were just going through what's often referred to as a low-volatility regime or a low-volatility cycle,” he said. “We actually appear to be coming out of a low-volatility regime and going into a high-volatility regime, which is normally characterized by VIX spending more time in the 20s.”
However, Rhoads doesn’t attribute the VIX’s heightened levels to fear alone.
“What we saw in August relative to what we've seen in January of this year has a surprise component to it,” he said. “The VIX was elevated going into 2016 and has stayed up in the 20s without the same sort of follow-through to the upside that we saw in August because there's been a lack of surprise, for lack of a better term.”
And Rhoads doesn’t expect a major drop in the S&P 500 similar to August, either.
“The VIX gives us an idea of how concerned market participants are,” he said. “The fact that the market's being a little bit more vigilant—and when I say being vigilant, VIX is higher because the demand for portfolio protection is higher as well—you might not see the selloff or at least the type of selloff that we saw back in August.”
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