The Risks of Complacency

Eran Peleg, CIO December 26, 2016

The VIX index stands at 11.4%.

The VIX is a measure of the implied volatility of S&P 500 index options. It reflects investors' forward-looking expectations of US stock market volatility. When investors expect high volatility and are nervous, VIX rises. When they are calm, it falls.

Source: Yahoo Finance

At extremes, the VIX can often serve as a contrarian indicator. Very high levels are usually observed during market crisis, when equity prices are down – just before a reversal begins and equities jump back up. At the other extreme, too-low levels may imply that investors have become complacent, signaling that equity markets may be vulnerable to a correction.

Examining the long-term chart of VIX (below), one can easily observe that current levels are very low. Has the market become too complacent and has chosen to ignore the risks that are still out there? This does not necessarily mean that a correction is just around the corner. At times, VIX can remain at these levels for quite a while. However, for risk-focused investors, it does call for increased caution.

Disclaimer: Nothing contained herein is investment advice and one should consult with a professional about their investment situation before they make any investment decisions.