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Who could have predicted that traders would be celebrating the decline of the Chicago Board Options Exchange’s volatility index below the 50 mark?

We saw the VIX peak late October, coincident with the worst of the credit freeze and market panic. The VIX closed yesterday at 47.76, down 11%, for the first close below 50 after an incredible run of 21 consecutive days above 50.

The VIX peaked late October, coincident with the worst of the credit freeze and market panic.

Volatility has begun to diminish as investors reduce their worry about the state of the markets, even as the outlook for the economy worsens.

One thing we learned: The prior measure for volatility “highs” around 30 are not reliable entry points for bad dislocations.  They have in the past signaled sufficient panic that you could buy in, but that is a level that traders may no longer find much faith in.

Peter Boockvaar reminds us that the VIX has closed above 30 for 37 consecutive days, and may still surpass the period in 1998 during the Long-Term Capital Management debacle where it was above that mark for 50 days.

The current worldwide liquidity crisis may yet take a long time to stabilize . . . and I would expect the VIX to also take an equal amount of time to find a more moderate level.

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Previously:
Fear Returns to the Markets (September 18, 2008)

http://www.ritholtz.com/blog/2008/09/fear-returns-to-the-markets/

Chart of the Day: VIX versus SPX (June 23, 2008)

http://bigpicture.typepad.com/comments/2008/06/vix-versus-spx.html

10 Year VIX versus SPX (June 24th, 2008)

http://www.ritholtz.com/blog/2008/06/10-year-vix-versus-spx/

Category: Contrary Indicators, Markets, Options, Psychology, Technical Analysis

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11 Responses to “VIX Slips Below 50”

  1. The VIX is one of those indicators that most of the time doesn’t matter — until it suddenly does.

  2. DL says:

    It’s starting to look like 70 is the new 30.

  3. karen says:

    i’m not thrilled that spx just dropped below 980. my picks today were vlo and ibn; thus far i would have been better off with sds. agree with barry on $vix… in hindsight it’s a crystal ball. 60 minute vix is rolling over; 30 minute vix is conflicted.

    crap shoots are so much fun!

  4. DL says:

    For those of you who think that QID and SDS are just too tame:

    http://www.marketwire.com/press-release/Direxion-Funds-916219.html

  5. patient renter says:

    Well QID and SDS are less volatile than some of the other Proshares, but 3x leverage could be downright dangerous. I guess we’ll see.

  6. Bruce N Tennessee says:

    @DL:

    One good thing about these new funds…if they are leveraged 3 to 1 and you think you should be 30 per cent in stocks….wellllll…you can keep 90 per cent in bonds and invest the 10 per cent in the 3/1 funds, and viola! Two birds killed with one stone! I may get the hang of this economic stuff any day now…

  7. DL says:

    Bruce N Tennessee @ 1:45

    Of course, it’s not quite that simple, as a 12 month chart of QID or QLD (for example) will reveal.

  8. Ramstone says:

    It’s starting to look like 70 is the new 30.

    Yes, but what I want to knowis whats the new 15.

  9. roncfp says:

    Well that didn’t last long. So much for the “sub-50″ celebration…… 55 and climbing. Ouch!

  10. wasn’t that just a ‘classic’ pull-back to the nearby MA? whatever one that is denoted by the magenta line…

    I don’t think ‘volatility’ is going away, anytime soon. As a matter of fact, rather, “non-linearity is the new volatility”..

  11. Ze Carioca says:

    Ah.. selling vol. Best thing is when you sell 30 vol and it goes to 60, you rarely just lose 30. You get demolished!!!

    And when it moves like this you get demolished day in and day out. Basically if it’s moving Vol moves out. if it stops for a moment it gets too expensive to carry and comes in.

    Direction I am often wrong about but Selling options is always just insanity!!