VIX all over the news

Birinyi Associates came out with a report describing the VIX as a coincident indicator rather than a leading indicator.

Speculation that equity returns will be positive after the volatility gauge decreases and negative when it climbs has little basis in fact, Birinyi said. The VIX provides a summary of historical price swings and tends to move in lockstep with equities instead of forecasting their direction, the firm found.

Immediately, traders and commentators all over chimed in, but here‘s a quick summary of (some of) the responses.

Why is anyone so surprised? If it was such a good indicator, it would be easy to use and incorporate into a trading program, but it’s not. For those following at home, we’re long the VXX (VIX ETF). It’s not supposed to provide a hedge, nor are we viewing it as predicting the market. It just looks to be undervalued based on its long term averages, after having gone through a massive down move. We were early getting in, but are still holding on. If you want to express a negative view on the market, there are better ways that are more efficient, more direct, etc.

For each investment or trade, we continue to recommend that you decide WHY you are getting into the trade BEFORE placing it. What view are you expressing? The VIX is just another asset that the market sometimes underprices and that shows mean reverting tendencies.

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