VIX Risk Indicator Pricing In Calmer Waters For US Stock Market In Near Term
By James Picerno | The Milwaukee Company | jpicerno@themilwaukeecompany.com
TMC Research’s VIX Risk Indicator has fallen to -1.6, a four-month low, which suggests that stock market volatility is expected to be relatively subdued for the near term.
The VIX Risk Indicator is a proprietary index that anticipates the near-term outlook for the VIX Index, which tracks the market’s expectation for stock market volatility.
A reading below zero for the VIX Risk Indicator implies that the VIX Index will remain low/moderate for the near term, which equates with a relatively low expected probability for a significant stock market correction for the next one to two weeks.
The recent surge in US stock market volatility may give way to a period of relative calm for the near term, based on TMC Research’s VIX Risk Indicator (VIX-RI).
VIX-RI uses a set of analytical tools that measure trend to quantify the projected level for the VIX Index (a proxy for market uncertainty) for the immediate future, up to two trading weeks at most. The value proposition for modeling the VIX outlook: When the VIX rises, it’s typically accompanied by a fall in equities (S&P 500 Index). As a result, developing a probability estimate of future levels of the VIX provides a basis for estimating if the stock market will remain relatively calm, or not.
The current VIX-RI reading is -1.6 (as of mid-day trading on Mar. 24), a four-month low that equates with expectations for a muted period of stock market volatility. A reading below zero for the VIX Risk Indicator implies that the VIX Index will remain low/moderate for the near term. The standard caveat: all forecasts are prone to error due uncertainty about the future.
When we last wrote about the VIX-RI on Feb. 6, the indicator had fallen to a neutral level, which implied that the stock market would remain relatively calm for the near term. As it turned out, the S&P 500 Index posted flat to modestly higher levels for the next eight trading days before a three-week correction kicked in.
The current VIX-RI suggests that market volatility is expected to remain relatively low for the immediate future, which in turn equates with a forecast of flat to higher levels for the S&P 500 in the near term.
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