What is the VIX?
The VIX is an index that tracks the current OEX contract. An OEX contract is an option contract on the S&P 100-the biggest caps of the big cap index (S&P 500). OEX options trade just like options on stocks. You can buy a specific strike price, by the contract. Unlike options on stocks, you cannot exercise it to own a piece of each stock in the S&P 100-it is all cash. If you go naked and lose, you settle up in cash. The option expires on the third Saturday of each month just like options on stocks.
The VIX tracks this contract that tracks the S&P 100. When using the VIX as an indicator, we look to see if it is working in an inverse relationship to the direction of the averages. In other words, when the VIX spikes up higher (in the upper 20's to low 30's), we want to see the averages beaten back. When the VIX is in the low 20's, we want to see the markets on a run up. If this pattern starts repeating itself, the VIX can be a reliable indicator. When the NASDAQ is on a big run, the VIX doesn't track very well. when things get choppy, it works better.
In January, when the VIX spiked near 30, that was a pretty good sign the NASDAQ was going to move up. When it hit the low 20's, a run was in its last day or so. In late January, it spiked to 29, and the NASDAQ was off and running. It was a strong move, and when the VIX fell to 21-22 the NASDAQ just moved sideways-that indicates a stronger move in afoot. The VIX steadily rose as the NASDAQ moved sideways until the VIX hit 29 and the NASDAQ started to move up again. Volatility rose on the OEX, but the NASDAQ did not sell back; it held steady. When volatility reached a peak, the NASDAQ moved back up. The past two weeks, it has been a harder read, and we are not confident it will give us enough accuracy as a read on its own-it needs to be combined with the usual price/volume indicators.
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