The stock market has gotten the kind of wakeup call that it hasn't had in a while.
Over the past week, the CBOE S&P 500 Volatility Index (^VIX) has surged a whopping 54% to 18.99. Although the VIX has traded at depressed levels for most of 2013, stock market sentiment can change on the dime. And right now it is.
While most stock market pundits were dismissing the significance of depressed volatility, we alerted our readers of the VIX trading opportunity. In our ETF Technical Forecast, on Feb. 13, when the VIX was at 12.98, we wrote:
"The VIX fell below its short term uptrend line, and today closed just below it. However, the VIX is still showing positive divergence with the market as it has not made a lower low than its Jan.23 low of 12.30 even though the stock market has made higher highs. Buying the VIX remains the better option in hedging the downside risk. The fact that actual volatility also is again approaching its low range (average true range below 10 again), but the VIX is not, is another data point supporting the VIX may be bottoming here. Once the VIX makes higher highs (above 14.5) a confirmed trend change from down to up will be upon us. This likely will coincide with a market top of some significance."
A depressed VIX can be interpreted as too much complacency or lack of fear in the market. It's frequently used as contrarian sell signal. Conversely, an elevated VIX infers a high level of fear and could be a good buy setup, depending on the circumstances.
The VIX reached an all-time low of 9.31 on Dec.22, 1993.
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