The VIX, or CBOE Volatility Index, hit a high on Monday that has not been seen since late June, as investors’ fears of rising interest rates helped lead to some intraday stock market declines. The benchmark gauge of interest rate expectations is the yield on the 10-year Treasury note, which remained elevated just off Friday’s new seven-year high around 3.24 percent, leading to increased nervousness in the markets. Of course, it doesn’t help matters that major stock indexes like the Dow are just starting to come down from recent all-time highs.
What is the VIX?
The VIX, which is often referred to as the ‘fear index,’ has become the primary measure of overall market anxiety. The index works by inferring investor expectations of near-future market volatility through S&P 500 options prices (calls and puts). The higher the reading on the VIX, the more fear and volatility are considered to be present in the markets.
The vast majority of the time, the index remains below 20, with infrequent spikes above that level occurring when panic strikes. One prominent example of such a spike was during the financial crisis in late 2008, when the VIX hit its all-time closing high of 80.86. A more recent example occurred just this year, when a closing high of 37.32 was reached in early February as stock markets tumbled.
Though the current spike is still well below 20 (ranging from 15 to 18 on Monday), the sharp rise within the past few days from last week’s 11-area lows is both dramatic and worrying for many investors. Any further VIX surge that extends its climb above 20 could signal an even bigger sell-off in equity markets.