Tuesday, October 12, 2010

Falling Volatility Index (VIX) is Another Sign of Complacency

The S&P 500 volatility index (VIX) has fallen to 18.55, which is the lowest level since late April.

The VIX is quoted in terms of percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, on an annualized basis.

The current VIX price of 18.55 represents an expected annualized change of 18.55% over the next 30 days, meaning a change of plus or minus 5.4% during the next month. To be precise, options on the S&P 500 assume a 68% chance (one standard deviation) that the magnitude of the S&P 500's 30-day return will be less than 5.4% (up or down).

Lower expected volatility is another sign of investor complacency, along with other sentiment indicators like put/call buying ratios and the AAII survey.

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