Bloomberg News

VIX ‘Provides Little Guidance’ on Stock Trades: Chart of the Day

December 06, 2011

(GRAPHIC: COD_STOCKS_VOLATILITY_120611. CHART OF THE DAY. Size: 3C X 4in. (146.0 mm X 101.6 mm) Expected by 15:00.)

Dec. 6 (Bloomberg) -- The most widely followed “fear gauge” for stocks sends relatively weak signals most of the time about whether to buy or sell, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist.

The CHART OF THE DAY compares the performance of the Chicago Board Options Exchange Volatility Index, known as the VIX, and the Standard & Poor’s 500 Index since stocks started their most recent bull market in March 2009.

During the past four months, the VIX fell to 27.84 from a second-half peak of 48.00. The readings are based on the prices paid for S&P 500 options.

“At current levels, the VIX provides little guidance for investing purposes,” Levkovich wrote in a Dec. 2 report. He added that the index “is not that effective as a market-timing tool unless it is at extremes.”

When the VIX was less than 30, the S&P 500 had an average gain of 2.9 percent in the next six months, according to the report. At less than 20, the average climbed to 3.8 percent. Levkovich found a bigger gap at 12 months, when increases averaged 6.9 percent when the index was less than 30 and 10.3 percent at less than 20.

Relatively high readings usually preceded larger gains in stocks, according to the report. When the volatility index was above 40, the S&P 500 rose 14 percent for the next six months and 29 percent for the next 12 months on average.

--Editors: Stephen Kleege, Chris Nagi

-0- Dec/06/2011 18:53 GMT

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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