A great analysis on the recent movements of the VIX volatility index comes from Barrons today. In a blog, titled “The Stock Market’s Seinfeld Show,” Steven M. Sears, looks at the current uselessness of the VIX (NYSEARCA:VXX) as a market metric, and compares the index to Seinfeld.
The VIX is a measure of volatility championed by the Chicago Board Options Exchange. The index is currently trading at an all time low, this has spooked some investors who see a lull in the metric as a sign that traders are falling in line with a narrative, a dangerous situation for investors. On the other hand, if the VIX (NYSEARCA:VXX) is high, it means that investors are confused and on edge.
Not so, according to Sears. The lull in the index means absolutely nothing, and those paying attention to it should stop. His thesis suggests that the current levels in the VIX are to be expected in a market that is slowly working its way higher and higher, recovering from a crash. Nothing more meaningful needs top be associated with the number.
That may not be enough to reassure investors. The VIX (NYSEARCA:VXX) is trading at lows not seen before the financial crisis. At a weekly low of 13.22, the index traded as low as it had in June of 2007, before the first waves of the financial crisis began to shake the market.
But, according to the Barron’s article, the VIX is not something to be worried about. It is in fact as complacent and ineffectual as the character from Seinfeld. The market is stuck in “purgatory”, according to Sears, and because it is a stock market measure, so is the VIX.
The narrative is very reassuring, but it can’t sway investors’ perceptions of the market. Even if the current lull in the VIX can not be read by traditional means, that does not mean the stock market is destined to continue creeping higher throughout 2013.
Wells Fargo & Company (NYSE:WFC) released a positive earnings report last week, and many more financials will be releasing their earnings throughout the coming week. A positive earnings season could shake the market out of its complacency, but negative surprises could send the market in the other direction.
The VIX (NYSEARC:VXX) may not matter very much, and it is certainly not the most reliable index for predicting the future of the stock market. That won’t stop investors worrying about it however. The VIX measures volatility in the options market, any other meaning is imbued in it by the reader.
So, while the VIX may not mean anything right now, it can still be a good indicator, and it is certainly one that many investors swear by. The current low in the VIX means that traders are all heading in the same general direction. That may not be good for the market, but it’s not necessarily a bad thing either.
It is difficult to make a positive statement about the VIX (NYSEARCA:VXX). The index indicates volatility, and right now volatility is low. Without putting a lot of implied meaning into the number, there is very little than can be extrapolated form its current state.