Decoding the VIX

October 23, 2017 1:35PM CDT

How low can it go? The Volatility index (VIX) is unofficially known as the “fear gauge” by investors. In 2007 the VIX was around the same low level of 1050 as it is now, and the e-mini S&P was climbing higher in a bullish formation. When the S&P began to decline towards the end of 2007, the VIX started to rally up. This was around the time the global economy was beginning to feel the pressure of the 2008 financial crisis and mortgage bubble. While this great recession persisted and almost brought down the entire financial system, the VIX was holding its high. It began to drop around 2009 and leveled out quite a bit. As many already know, the financial crisis of 2008 brought a great deal of regulation to the financial industry to ensure that market changing events won't get repeated. Historically, a low VIX means a stable economy, but it is important to note that there are many "catalyzing events" that can spike the VIX and change the overall market outlook, so it is important to watch the VIX closely to understand what the market sentiment is at any given time. A large spike in the VIX will mean there is a catalyzing market event, and investors should expect a volatile market following such a spike. Currently, we are seeing these lows equivalent to the 2007 lows in the VIX compared to a steadily climbing e-mini S&P. If there is an upcoming drop in the S&P, should we expect to see a surge in the VIX? 

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