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What Is the Low VIX Telling Us?   (November 22, 2006)


Take a look at the Volatility Index (VIX) and the Dow Jones Industrial Average (DJIA) for 2006:



As the VIX drops to a 20-year low, we should wonder: what is this low telling us? Some analysts would have you believe that the low VIX means nothing. But as you can see on these charts, the last time the market topped out, the VIX had declined to a relative low. And conversely, when the VIX jumped, those spikes of high volatility marked the market bottoms.

Is a record-low VIX meaningless? Time will tell--but it very likely means something. Extremes tend to reverse at some point, and so we have to ask: if the VIX rises, what happens to stocks? The answer is rather clear: stocks go down.


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copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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