Volatility, Fear, and Despair ... What is the VIX (Volatility Index) saying now?

Below is our daily VIX (Volatility Index) chart on a 60 minute incremental basis going back to last March.
But first, before we go to the actual VIX chart today, we will explain what the VIX-Volatility Index actually is.

The VIX explained:

Few really know what the Volatility Index is or how it is calculated.  Here's a brief explanation ...

The Volatility Index (or VIX) is a weighted measure of the implied volatility for real time $SPX put and call options. The puts and calls are weighted according to time remaining and the degree to which they are in or out of the money.  From this is created a hypothetical at-the-money option with a 30 day expiration time period.  In this way, they are trying to set a value that is equal to the equivalent value of the $SPX's current price.  (When a stock's option strike price is "at the money", it is theoretically the same as the price the stock is trading for at that moment.)

So what does that mean?  It means that the VIX really represents the "implied volatility" for the hypothetical $SPX put/call options on an "at the money" option value.

Still confused?

It all has to do with perceived risks.  The greater the perceived risks that are in stocks, the higher the "implied volatility".  Implied volatility is about the perceived risk in the stock market at a given point in time, and NOT about the size of price swings in the market.

In layman's terms ... how does this work?

It is actually quite simple.  When the stock market falls, there is an increased demand for put options.  Increased demand for puts means higher put prices and that generates higher implied volatilities. (Lower demand for puts means lower put prices and that generates lower implied volatilities.)

What else do you need to know?

Only that the VIX moves in an inverse relationship to the stock market.  When the VIX moves up, the market moves down.  When the VIX moves down, the market moves up.

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Now, let's move on to today's VIX chart vs. the S&P 500.

This month, the Volatility Index has itself been showing its own volatility.  A quick look at the boxed in area on today's chart shows the extreme and unprecedented high/low swings. 

Yesterday, the S&P had previously broken below below its triangular support and was moving down to its last support which was the previous price low.  That means there is only one support left that has to hold now, or more short term down action will occur.

Now, let's look at the Volatility Index indicator at the bottom of the chart.  Two things are apparent ...

One: The high/low swings in the boxed in area are extreme.  From a put option standpoint, this is implying great investor uncertainty as put buying increases sharply and then decreases sharply. 

Two: The action of the VIX is showing higher/highs and higher/lows.  That is the classic definition of an up trend.  So, the VIX has been trending higher, which means that after every round of put buying and selling, the next round is one of "greater" uncertainty by investors.

Many investors are anxious for an upside rally in the markets. We have had several attempts but none of them have held. 

What will the VIX need to show for a Bear Market rally to start and hold?  

The answer is that we will need a trend reversal to happen on the VIX ... in other words, when it starts to make lower/highs and lower/lows.  Until then, don't try to catch a falling knife.

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