The CBOE's Market Volatility Index or "VIX" is one of the primary tools used to measure investor trepidation. Commonly referred to as Wall Street's "fear gauge," it offers a pretty clear picture of how nervous investors are about investing. Last week, the VIX fell to its lowest level since the financial crises.
The Good News for Investors:
Last Friday, the index fell below 11, the lowest since February 2007. This looks all the more promising when you consider that at this time last year it was hovering at 15 to 17. In the summer of 2009, fear was at an all-time high with the VIX soaring to 30. Clearly, investors are becoming more bullish and more brave as the stock market continues to rally.
The Bad News for Investors:
Some market experts see this renewed courage as a red flag, a sign that investors are becoming a little too comfortable, and that a market downturn is in the near future. These debbie downers might have a point, but the markets have shown their resiliency several times this year, and have outperformed overall expectations in the last five years.
The Bottom Line on the VIX:
The main concern of the pessimists is that we are entering into yet another time in our history when the stock market party comes to a crashing halt. Other experts, however, point to occasional market corrections over the past year that have keep investors sharp and not gleefully ignorant of a potential downturn. Hopefully, investors keep being bullish without becoming complacent. But if history has taught us anything, that's easier said than done.