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What Can Investors Expect from the VIX?

Schaeffer's Senior Technical Strategist predicts what's ahead for the VIX on Breakout

by 7/26/2012 9:52:13 AM
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The second of three videos I did on Yahoo! Finance's "Breakout" with Matt Nesto was just posted online. Earlier I talked about my broad market and sentiment views and why remaining bullish still makes sense. In this video we discussed everyone's favorite volatility measure -- the CBOE Market Volatility Index (VIX). You can check out my actual interview below, but here are some highlights on what we discussed.

  • There are many expecting a much higher VIX this summer, similar to the spikes of the past two summers. We recently had record call open interest on the VIX, and this shows just how many traders are bracing for higher volatility. Yet, if the past few hundred years of history has shown us anything, it is you don't want to follow the crowd.

  • Looking at the VIX during the last bull market from 2004 to 2006, it trended between 12 and 20 for several years. In other words, during the last bull market a VIX of 20 was considered high, yet now we consider it to be very low. Eventually, the VIX will probably make its way to the low teens.

  • The majority of the VIX buyers are the big institutions and hedge funds who purchase volatility to hedge themselves or make outright bearish bets.

  • Taking it one step further, historical volatility has totally imploded. Just because the VIX was "low" the last time it was down around 16, you need to at least consider historical volatility, as well. And when you do, a VIX in the teens might not be "low"-- in fact, it could be more normal than anything.

  • There still could be some volatility, of course, with things like Europe and the upcoming election out there. Still, we don't see the odds in favor of a major pullback here. On the recent 10% correction in the S&P 500 Index (SPX), we actually saw as much put buying on individual equities as we did back during the lows of March 2009. That sums up how much fear is out there, and this is very bullish for the rest of the year, from a contrarian point of view.

To hear more of Ryan's latest interview on Breakout, click on the play button below:


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