Well, two theories come to mind. First, with bond yields so low historically, and gold underperforming, investors searching for risk-off holdings are increasingly turning to volatility.
Thus, any credit market risk that has the potential to spook the market—even if it doesn't cause as sell-off—has caused VIX to jump. Case in point: As Italian yields rose Wednesday, investors rushed to buy volatility and insurance on their portfolios. Such panic buying of portfolio insurance should, and did, cause a flush-out and carpet shake of the markets that pushed S&P higher once everyone had overpaid for protection.
As Bernanke spoke to Congress Wednesday, the VIX came off its highs very hard. Typically, I like seeing the VIX come down hard in the short-term, because it means investors view the risk to the overall market as being over. The VIX moves up and down, I find, confirms that all we saw was a carpet shake in the market's bull run.
That was the first theory. But my second theory puts things in a more apocalyptic light. If VIX is rising and the market is rising, like it did in 2007, are we experiencing an unraveling in the credit markets somewhere in the world, such as in Europe, that the average retail investors has not caught on to?
We did see one institutional investor look to buy 10,000 May $20 calls, and sell May $25 calls, by paying $0.24. Meanwhile another trader bought 5,000 March 17/23 call spreads for $0.56 each. Thus, even as the smoke has cleared—likely for the next month at least—investors intraday are starting to look for hedging strategies in case something ugly comes up down the road.
Strategies like these tend to pay off very well. With the VIX moving so hard, you don't really need a lot of volatility protection. However, in case my second theory comes to fruition, stay long stocks, but keep buying insurance in case a bad storm hits.