Fear Indexes

Volatility indexes give you an indication of what people currently expect from the markets but it is more for protection, akin to buying insurance after an earthquake. The VIX was developed by a professor, Robert Whaley. It tends to move up and down sharply on days when stocks are getting whipsawed. For example, when the Dow dropped more than 2.5% on Friday on renewed worries about Europe, the VIX was up 15%. A lot of people look at the VIX as possibly a predictor of the market direction. This is totally wrong. The reason it is called a fear index is it jumps when the market declines. But, it does not jump before the market declines. That is an important factor for investors to keep in mind given that we live in a world where volatility reigns supreme. Big moves in the VIX or any other similar index are not something that the average investor should use to make market decisions. The VIX is a weather vane. A rainy day today does not mean you should necessarily bring an umbrella to work tomorrow. Volatility is unlikely to end anytime soon. It is important for investors to remember that.