Stomach-churning market awakens an obscure index
Fear is running high on Wall Street. Just look at the fear index.
With all those stomach-churning freefalls and sharp reversals in the stock market recently, traders are keeping a nervous eye an obscure index known as the VIX (the Chicago Board Options Exchange Volatility Index). It measures those wrenching market swings. A rising VIX is usually regarded as a sign fear, rather than greed, is ruling the market. The higher the VIX, the more unhinged the market looks.
So how scared are investors? On Friday, the VIX rose to 70.33, its highest close since its introduction in 1993. To some experts, that suggests that the wild ride is far from over.
"Right now, it's an extremely important part of the puzzle," Steve Sachs, a trader at Rydex Investments, said of the VIX. "It's showing a huge amount of fear in the marketplace."
The VIX is hardly a household name like the Dow. But lately, it has become a fixture on CNBC and other financial news outlets. Some traders think the publicity has only added to the anxieties the VIX is intended to reflect. "The VIX is a self-fulfilling prophecy," said Ryan Larson at Voyageur Asset Management.
Speaking on Thursday, when the VIX hit an intraday high of 81.17 before closing lower, he said: "You see the VIX trade north of 80, and of course the media starts to pick it up." Larson continued. "It's blasted on the TV, and for the average investor sitting at home, they think, 'Oh, my gosh, the VIX just broke 80 - I've got to go sell my stocks.' "
Put simply, the VIX measures the degree to which investors think stocks will swing violently in the next 30 days - and the index has a good track record. It spiked in 1998 when a big hedge fund, Long-Term Capital Management, melted down, and after the Sept. 11 terrorist attacks.
Some investors are skeptical. "If you're trading the markets, you pretty much know the fear, you know the volatility. I don't need an index to tell me there's volatility out there," Larson said. 