The question that never seems to go away this year is, “Is VIX Too Low?” I was on Reuters Global Markets Forum chat this morning and got that very question. As a follow up I tried a little different perspective on VIX relative to the S&P 500. I took the standard deviation of daily price changes for the S&P 500 for each year since 2007 and through today for 2013. Then I compared the average VIX for each year to daily market returns. The results are on the table below –
Note the daily price changes in 2013 have been lower than any of the other years going back to 2007. So far this year the standard deviation of daily returns is 0.72, a tad lower than 2012. The average for VIX is much lower than each year on the table, maybe too low when just considering the numbers. However this leads to anecdotal answer to the question.
When the S&P 500 drops, VIX moves up. At least that’s the historical relationship about 80% of trading days. However, despite the reactionary nature of VIX relative to market changes it is still a forward looking measure. The few drops that we have gotten in the US stock market this year have always been followed by a recovery to new highs. Yes, VIX has been low, but how can you say it has been ‘too low’ when it has also been right about the equity market. VIX has not indicated panic and there has been no need to panic …yet.