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VIX in Perspective – just like the Skipping Stone

Posted by nexvucapital on February 26, 2013

When we were young we would sometimes spend considerable time trying to find that perfect flat smooth stone that would be best suited for skipping across the surface of the water. And, if it was thrown just right it would release its energy in a sequence of movements where each subsequent bounce off the surface would have less action than the preceding one until finally that perfect stone would exhaust its energy and disappear beneath the surface forever.

Today, we draw your attention to the market equivalent of the Skipping Stone and have attached the 5 year chart for the VIX – also known as the ‘Fear Index’. We could fill pages writing about fear and the markets but that is done so go Google it. We wanted to focus on how market fear works over time – like the perfect Skipping Stone its greatest release of energy is on the first move and each successive move/event results in less energy being released as can be seen in the following chart of the VIX:

VIX Weekly  5 Year - February 26 2013

Now a sample of the headlines from yesterday:

 Check Out Today’s Incredible Spike In FEAR

 Reasons behind huge spike in VIX

 VIX up sharply on fears over US stimulus

We wanted to put things in perspective and that requires a look at the above VIX chart. The 2008-2009 financial collapse (almost) was the the true fear event of the past 5 years as the consequences of a financial collapse are truly something we should all fear unless we are in the can of spam, a gold bar and a shotgun crowd. As an aside, we have often wondered what the gold bar would be for other than an obvious replacement for the shotgun should you run out of ammunition. Back to the chart…as can been seen each subsequent crisis since 2008-2009 has resulted in the release of less energy in the form of fear to the point where the VIX is now trading in a range that resembles the period preceding the 2008-2009 peak. The VIX demonstrates what we already know – as we remove ourselves through distance and/or time from the stimulus/event that caused our fear – the fear subsides. Our DNA pre-programmes us to run from our fear. Also note, that the best time in the last 5 years to buy equities was when the VIX was peaking in 2008-2009.

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