Reading (and Misreading) the VIX
The VIX index, which reflects options prices for the S&P 500, is commonly believed to be an indicator of volatility in the future. Today, the VIX is at a two-decade low. Investors, it appears, are more confident than ever. Is this outlook warranted? The answer might be no.
People often misunderstand the VIX. When the index is low it represents a broad perspective that volatility will be muted. Too frequently people believe this means the market is unlikely to drop. However, low volatility has just as much to say about the upside. That is, a low VIX reading also represents a lesser likelihood for dramatic increases in share prices. The point is this: The VIX is low when investors see no significant downside or upside potential.
Unfortunately, too many investors read headlines of today’s low VIX and expect windfall profits right around the corner. Moreover, valuations are running high. This misconception about volatility combined with outsized valuations could create a challenging environment.
Are share prices today representative of the true underlying inherent values? The Schiller P/E seems to indicate that valuations are in fact running historically high. Today, this measurement of value rests at 29.7. This number is more than 76% higher than the historical mean of 16.8%. What does this mean? It means it’s time to rethink the long-term prospects of the stock market.
Higher Shiller P/E ratios were noted shortly before major market downturns. The Shilller P/E was high leading up to the 2000 dot come bubble. Investors saw a similar phenomenon shortly before the 2007 financial crises. These signals do not guarantee doom but they should encourage investors to think more critically about passivity in a market buoyed more by fun than fundamentals.
A passive approach has its benefits. Costs are low and long-term performance is respectable. However, as irrational exuberance pervades the market it might be time for investors to ask how they can position themselves more aggressively today for a potential drop tomorrow. KINFO users are relaying on one another to explore ways to bolster their portfolio performance. Moreover, the KINFO community connects original thinkers who want to be prepared for a bear trend amid high valuations and low volatility.
With insight from around the globe KINFO users are discovering new portfolio designs that work to capitalize on the real value of individual trades rather than broad market sentiment. Log on and link your account today to gain valuable insights from users who want to create a proactive approach as indicators give reason to question the future of passivity. KINFO users aren’t happy on the sidelines. We want to be in the game so we can score.