Term of the Day: VIX, the ‘Fear Gauge’ 😱

😖😀😌😡😭Unlike emotional volatility, market volatility is tracked and measured. It’s been extremely low these days. What does this mean?

What is the VIX?

The Volatility Index, or VIX, reflects investors’ expectation of volatility in the S&P 500 Index in the next 30 days.

‘Fear gauge’

The VIX is known as the “fear gauge” because it surges whenever uncertainty, or fear, hovers over the market. When volatility spikes sharply, as it did during the European debt crisis and the U.S. financial crisis, investors are fearful and are more likely to sell their stocks.

It’s been really low

While the S&P 500 is trading at all-time highs, the VIX is hitting new lows. It has closed below 10 for six days in a row.

When the value of the VIX is under 25, that’s low volatility, and a reading of 10 or below is extremely low volatility.

In May, the fear gauge hit a notable low close of 9.8, which was extremely rare. Volatility has kept at low levels since. Many fear the market is too calm.

Why the fear?

Volatility in the stock market coincides with major economic, financial and political news. Despite the waves of drama in Washington, volatility has been low.

Stock investors have ignored political turmoil and instead have focused on the new administration’s economic agenda. But analysts worry that investors are too complacent about the risks to the stock market.

Past periods of very low volatility have sometimes preceded big market declines. The last time VIX was near that level was in early 2007, just before the financial crisis hit.

There is no direct cause and effect, of course, since the VIX is simply measuring the expectation of future volatility, but the similarity of the two periods has some investors on edge.