Trader’s Insight: Why Did VIX Close at Long-Term Lows Last Week?
For years, traders have used the market volatility index, or VIX, as a tool for measuring the jumpiness of markets. When markets are calm, and generally trending higher, the VIX declines and stays low.
When markets start seeing bigger daily swings, the VIX tends to rise. The end result is a chart that looks much like an EKG. And investors have tried to trade this trend for some fast profits.
Last week, markets hit new all-time highs. And the VIX closed at its lowest level since November 2019. That means markets aren’t just calm, but complacent. That’s because the VIX exploded higher just a few months later as the Covid crash started.
To some extent, the move in the VIX, reflects supply and demand. Traders don’t expect much market volatility in the next 30 days. That leads to a low VIX.
And the options market is betting that markets will also trade calmly. Investors can likely expect a pretty slow few weeks ahead in the market. That may include a few down days.
For the most part, that reflects stocks calming down as earnings season ends. And it reflects the recent inflation data, suggesting that while high, it may be starting to crack lower.
Investors may want to reassess market conditions later in the summer, especially as September and October tend to be the market’s most volatile months on record.