What's the 'Fear Index' Forecasting for Year's End? | ETF Trends

The year 2008 can be marked by huge, volatile oscillations in the markets and exchange traded funds (ETFs), and we are left wondering if this trend will continue. One indicator that has come under the spotlight through this year’s volatility can perhaps shed some light on the matter.

As dismayed investors pack and temporarily leave the market, the obscure index known as CBOE Volatility Index (VIX), plummeted to numbers last seen in September, according to Yahoo! Finance. The change in investor behaviors may reduce large moves through the end of the year. That “no news is good news” thinking could be nice for a stock market that has lost about 35% since Jan. 1.

The VIX takes a 90-day view of trader “fear” in the market and measures activity in options trading. VIX-watchers divide the index by 16 to predict the percentage swing that traders expect in a specific month.

Before the credit fiasco, a VIX level above 30 translated to high volatility and a level of 40 was roaming into recession territory. But after the credit crisis, the rules changed and the VIX climbed up to 80, which may very well be the new 40.

The downward trend in the VIX could be a passing anomaly but it should be noted that the VIX is still trading at half its high of 80 which is still indicative of high valitility.

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.