As the rally in equities gains momentum, exchange traded funds linked to the CBOE Volatility Index, or VIX, are revealing greater complacency in the stock market, with the index on Friday hitting a new five-year low.
The VIX is now at 12.59, hovering around its lowest point in a half-decade. [Vanguard: Where’s the Volatility?]
Meanwhile, inverse VIX funds have been killing it. VelocityShares Daily Inverse VIX Short Term ETN (NYSEArca: XIV) surged 171.8% over the past year and the ProShares Short VIX Short-Term Futures ETF (NYSEArca: SVXY) jumped 168.0%.
The VIX, a measure of expected or implied volatility on large-capitalization U.S. stocks through options traded on the S&P 500 index or more commonly known as the market’s “fear” gauge, has been moving lower while the S&P 500 moves toward its all-time highs.
However, investors should be wary of continuing to short the VIX as all the good economic data may already be factored into the markets.
“While I’m not bearish, I don’t see many upside motivations at these levels,” Donald Selkin, chief market strategist at National Securities, said in a Bloomberg article, citing the low level of the VIX as a sign the market was overbought.
Spending cuts or so-called sequestration talks are only two weeks away. The VIX spiked up to 23 ahead of the “fiscal cliff” talks. Still, the markets may not be that agitated this time around.
“We’re just continuing to desensitize,” Jim Paulsen, chief market strategist at Wells Capital Management, said in a CNBC article. “How many times are you going to sell out on some kind of armageddon story only to watch the darn thing go to new highs?”
For more information on the VIX, visit our VIX category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.