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Market's 'fear gauge' soars to 2015 high

Volatility surges

The market's most widely watched fear gauge skyrocketed to a 2015 high Friday, indicating that investors are paying dearly for protection as stocks drop.

The CBOE Volatility Index, known as the VIX, has doubled in August. If it finishes the month here, it would log the largest monthly gain ever (using data going back 1990). That beats out the 91 percent advance seen in September 2008.

It is worth noting that the jump comes off of strikingly low levels. Just two weeks ago, the VIX hit a one-year low, as the traded in a remarkably tight range over the past several months.

That range was broken dramatically to the downside this week, as the large-cap index fell nearly 5 percent in just three sessions.

S&P dips below 2K, Dow plunges triple digits as growth concerns weigh

The VIX tracks the prices of options on the S&P 500. It is commonly known as the market's "fear gauge," since options are more commonly used to hedge risk than to speculate on upside.

More directly, however, the VIX is a measure of the expected volatility in stocks over the next 30 days. A swift S&P move to the downside should thus increase the level of the volatility index.

Yet this rise is unusual even in the context of the recent stock slide. The VIX tends to climb about 4 percent for every 1 percent fall in the S&P, but with the S&P dropping less than 2 percent Friday, the VIX is surging 23 percent.

Yet amid the surge, there may be a sign that the worst is already over.

Investors cannot directly trade the VIX, but they can trade VIX futures. And the "curve" of VIX futures tend to imply that the VIX will rise in the future, which makes sense, given that there is more uncertainty around future 30-day moves than of the volatility over the next 30 days.

Yet on Friday, VIX futures curve inverted. With the VIX above 23 at noon EDT, the April VIX futures traded at 19. That implies that traders expect more volatility in the near future than in the medium term.

According to Larry McDonald of Societe Generale, VIX inversion has preceded a market bounce four times over the past year.

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