Thursday, January 7, 2010

Fear subsides, prices rise (15)

Yet another update in a long-running series. The VIX index is a good proxy for the level of uncertainty, fear and doubt in the market. As FUD declines, prices should rise, and that has been the story ever since last March. This is a variation on the larger theme of confidence; confidence in the banking system almost collapsed just over a year ago, and it has been gradually rebuilding ever since. With greater confidence, money that was essentially stuffed under mattresses is getting spent, and the wheels of commerce are spinning back up as a result. It's only natural that equity prices should move up as confidence returns. This process has a ways to go, in any event, since a "normal" level of the VIX would be in the range of 10-15.


The Lantern said...

Thanks for posting - I watch VIX a lot. Only question is whether 10-15 is really "normal"? Long term broad equity market volatility is closer to 20%... now I think the VIX is "saying" we are less concerned than we normally would be with stock market volatility. I am pretty surprised it's this low honestly. (formerly Orange Lantern)

Scott Grannis said...

Stock market volatility has indeed averaged 20% for the past 20 years. But there have been years of relatively tranquility when it fluctuated between 10 and 15%. That's what I'm calling "normal." I can't find the exact numbers right now, but I think that equity volatility averaged about 12% over many decades leading up to the 70s.