The Volatility Index or VIX, is a useful index for measuring investor/trader sentiment in regards to the broader stock market's health. It reflects option premiums and is therefore a decent way of peering into the thinking of those who write the things and what they are expecting/fearing in the immediate future. As with any market index, it has its shortcomings but all in all, it is remains a good gauge of sentiment.
While the following chart is not scientific it is helpful in understanding the impact of the Federal Reserve's monetary strategies over the past few years. I prefer to look at this chart as a demonstration of official monetary sector meddling into the affairs of capitalism/free markets.
In simple terms, the lower the index moves, the less fear or concern option writers and thus investors in general have towards the health of the US stock markets. When the index is rising, it reflects unease/discomfort/fear in those degrees.
Note how sharp spikes upward have been accompanied by expectations of the ending of previously announced and implemented rounds of Quantitative Easing. You can see the first of these spikes back in April 2010 when QE1 was coming to an end. It was not long after that the Fed announced the next round of QE, this one involving outright purchases of Treasury bonds. That was good for another outbreak of "DON'T WORRY- BE HAPPYitis" among the Wall Street crowd.
Of course, once that virus ran its course and QE2 expired in the summer of 2011, back came the awful realities of the gargantuan mountain of indebtedness overhanging the US economy. Even with those artificially induced lower long term interest rates, those stubborn consumers were not spending fast enough to offset the proliferation of bad debts, foreclosures and delinquencies. Throw on top of that massive problems in the Eurozone and investors actually seemed to awaken from their drunken stupor of indifference long enough to begin worrying.
"Tsk, Tsk' said the Central planners and out came the European Stability Mechanism in conjunction with the Fed's "Operation Twist" (the sale of maturing shorter dated debt in exchange for the equivalent amount of longer dated debt) and PRESTO! - ALL WORRIES GONE. "I CAN SEE CLEARLY NOW, THE RAIN IS GONE. I CAN SEE ALL OBSTACLES IN MY WAY.... IT'S GONNA BE A BRIGHT, BRIGHT, BRIGHT SUNSHINY DAY".
Down falls the fear level among investors as the injection of drugs courses through their veins. Greece however flared up again, as did Portugal, as did Spain and others in the Euro Zone and that produced a fleeting burst of anxiety/concern among investors early this year. With the ECB and the Eurozone ministers working feverishly to calm worried markets, it did not take long before all was well once again.
Now, as we have entered the final quarter of this year, the Fed has announced another round of QE (QE3), this time consisting of the purchase of $40 billion per month of Mortgage Backed Securities. It is odd, considering the reaction of the market to past pronouncements from the Fed, that the VIX actually spiked a bit higher instead of sinking even further on the news.
The index did move lower however in October when proof of the actual buys under this latest round of QE were evident. However, it should be noted that the index is beginning to rise again.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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