In recent days, the VIX index, the CBOE S&P 500 Volatility Index, also known as the fear index, has dipped back into extremely low territory, indicating high investor complacency and confidence in the short-term future of low volatility and higher stock market prices. Today’s low volatility and readings in the VIX index is a result of investors anticipating continued Federal Reserve intervention in the markets. The current situation has driven the VIX index to the 12-13 level in recent days, a level near the index’s historical lows.
VIX is widely viewed as a way to measure market risk and forecast future stock price movements. Some observers say that when the VIX index is low, market risk is low, and prices are likely to trend higher. This camp also says that when the VIX is high, lower prices are ahead as fear is the dominating force in the market.
Contrarians say to “sell the greed, buy the fear” and so when the VIX index is low, contrarians would be anticipating declines in stock prices ahead and selling long positions or going short. When the VIX is high, they would be expecting a reversion to the mean and entering long positions.
This correlates to Warren Buffet’s famous advice, “be fearful when others are greedy and greedy when others are fearful.” Right now, greed is dominating global market places and so perhaps the foxy old Oracle of Omaha would be saying that now is time to be fearful instead of greedy and complacent.
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