The CBOE Volatility Index, or VIX, the index that Wall Street uses to gauge fear among investors, spiked almost 28 percent today, almost entirely to the ongoing turmoil in Libya.
The VIX, which surged 27.8 percent to just under 21 on Tuesday, has gained more than 31 percent over the past five days.
Essentially, the VIX measures how volatile stocks in the S&P 500 are expected to be over the next thirty days.
However, as long as the VIX remains below 30, overall fear in the marketplace is considered low. Still, if the situation in Libya continues to deteriorate – and there seems to be no sign of any kind of easing of tensions – VIX will surely climb above 30, reflecting the anxieties of traders and investors.
The VIX soared to its all-time high of just under 90 in October 2008, just after Lehman Brothers collapse amidst legitimate fears that the global financial systems was teetering on the brink of Armageddon.
“Generally, readings over 30 are associated with major pullbacks, major corrections, or bear markets,” said Mark Arbeter, chief technical strategist at S&P.
“The faster the stock market goes down, the more that the VIX will spike. The VIX is a lagging indicator based on price movement. When price moves quickly, especially to the downside, option premiums rise quickly, pushing the VIX higher.”
Thus, while today’s 28 percent rise in the VIX may seem high, consider what happened on Feb. 27, 2007 – the fear gauge surged an astronomical 64.2 percent after a near 9-percent plunge in the Shanghai stock exchange prompted alarm all over the globe.