Volatility Index Is So Low It Has to Go Up

investing.com:

The volatility index is so low it has to go higher eventually. Such seems obvious, but this year, despite the banking crisis, higher interest rates, and slowing economic data, investors continue to abandon hedges amid bullish optimism.

But what exactly is the volatility index, more commonly called the “VIX,” and why does it matter?

“The Cboe Volatility Index (VIX) is a real-time index representing the market’s expectations for the relative strength of the S&P 500 Index (SPX) near-term price changes. Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, particularly the degree of fear among market participants.

It is an important index in the world of trading and investment because it provides a quantifiable measure of market risk and investors’ sentiment.” – Investopedia

Investors view the “VIX” as a gauge of investor “greed” or“fear.” Given that investors tend to be wrong at extremes, such has been an excellent leading indicator of a reversal when the index reflects extreme fear or greed. Since there is an inverse relationship between the volatility index (VIX) and investor sentiment, the chart below inverts the VIX index for a better comparison. Unsurprisingly, low VIX readings correlate to investor bullishness.

To understand the relationship to the market, we created a composite index. The index combines retail and institutional investors’ net bullish sentiment and an inverted volatility index (1 minus the VIX reading). We overlaid the composite index against the S&P 500 index. Unsurprisingly, high index readings regularly associated