Long term VIX studies

The Volatility indices (VIX and QQV), are the insurance premiums paid by buyers of Calls and Puts to protect or profit from large price swings. The higher this premium, the higher the fear and expectations of large price moves. The markets can actually rise or fall with a rising VIX and vice versa like we saw in the late 1990's and early 2000's. A better way of measuring oversold and overbought conditions is the relative position of the VIX to the markets or the VIX to SPX ratio. This ratio shows the effect on the VIX of large moves in the market, and easily highlights extreme levels of emotions at both tops and bottoms over the long term.

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Volatility and SunSpots

To get a look at sentiment prior to the 1987 crash, we can take advantage of a correlation between SunSpot numbers and the Volatility index. While this linkage in behavior might seem strange, there have been studies correlating weather, harvests and industrial output and recessions with SunSpots. We can see by overlaying recessions over the SunSpot numbers that they match our expectations for high Volatility and Fear preceding these recessions.

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Charts courtesy of InvestmentTools.com

Volatility premium on SP-100

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Volatility premium on QQQQ

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Charts courtesy of StockCharts.com