The silver lining to volatile stock markets
17.05.12
Normal VIX is no help
However, at more “normal” VIX levels under 30 – where, incidentally, the index is today – the volatility measure isn’t of much use at all as an indicator of future performance. Mr. Levkovich found that S&P 500 average six- and 12-month returns under these conditions are little different than what you would find in any random collection of market outcomes. Even very subdued volatility readings below 20 – which would imply a high tolerance for risk-taking among investors – produced only run-of-the-mill returns.
“The sometimes intense emphasis on the VIX has led to almost simplistic views on measuring investor risk tolerance, yet it is not that effective as a market timing tool unless it is at extremes,” he said. “Indeed, at current levels, the VIX provides little guidance for investing purposes.”
He added that “some indicators suggest a mixed volatility outlook” – suggesting that the VIX isn’t likely to be a useful contrarian signal for market performance any time soon.
Source: Globe and Mail