Volatility index surges in the troubled stock market
Volatility is back in the stock market with a vengeance.
By one closely watched measure, volatility expectations jumped a whopping 50% Monday as stocks were pounded mercilessly for the second time in the last three trading days.
The index (charted below) gauges investors' expectations of short-term market volatility based on their trading of S&P 500 index "put" and "call" options, which can be used to hedge against market swings.
Other than a brief rise in March after the Japanese earthquake, volatility had been relatively subdued this year. It began climbing about two weeks ago and took a big jump Thursday before its even larger leap Monday.
Some traders consider the VIX a useful contrarian indicator that can signal a coming turn in the market.
When petrified investors dump stocks en masse, they set the stage for a rally in which savvy investors can pick up bargains.
For example, the mid-March peak in the VIX following the Japanese earthquake coincided with a trough in the Standard & Poor’s 500 index.
But a surge in the VIX isn’t always a good time to jump in.
The fear gauge hit an all-time peak during the global financial crisis in November 2008. But buying stocks then would have led to more losses. The market didn’t bottom out until the following March.
-- Walter Hamilton
Photo credit: Reuters