Relax—the ‘fear gauge’ is doing exactly what it’s supposed to be doing, expert says

  • The VIX just hit its lowest level in 10 years.
  • Arguments are swirling around the significance of the index, and whether it's a good tell of market "fear."
  • Some say the index's low levels come as no surprise, given the relatively quiet state of the stock market.

The CBOE Volatility Index appears to be playing a game of limbo.

How low can it go?

Just this week, the VIX hit its lowest level in 10 years amid a relatively muted stock market. Arguments are swirling around the significance of the index and whether it's a reliable gauge of the market's anxiety.

"I've heard a lot of people saying recently that the VIX is dead, that the VIX doesn't matter anymore … the VIX, in fact, is doing exactly what it's meant to be doing. It's reflective of the actual market volatility that we see," Jacob Weinig, Malachite Capital founding partner and portfolio manager, said Tuesday in an interview on CNBC's "Power Lunch."

"We have a historically low level of realized volatility in the markets. In fact, Q1 was the lowest realized volatility on record since 1965," Weinig said.

Furthermore, the low levels of actual volatility are easily flowing into the implied volatility measured by the VIX. This is due to what Weinig calls the "excessive" number of volatility sellers in the market, with assets pouring in to ETFs like the XIV, which reflects a short volatility position and has surged over 70 percent this year. Another fund, the SVXY, has risen by nearly the same amount.

"As long as there's that realized premium from implied to realized volatility, you are going to have vol sellers in the market, and that's creating very low levels of VIX," he said.

The market has traded in a remarkably narrow range recently, so it's no surprise the VIX is so low, agreed Piper Jaffray technical analyst Craig Johnson.

"We've gotten to very, very low levels in the past, in the early 1990s. Remember, that was a very bullish time for equities. And also in the mid-2000s, we saw the VIX at very, very low levels, and you stayed there for a long time," Johnson said.

In looking at historical data on the VIX, Johnson found that the last nine times the VIX fell below 12, the market has rallied about 75 percent of the time, with an average return of about 4.5 percent.

"I look at this and say, it's low, but this is a positive sign, and the VIX is not a good gauge for picking tops. It's a better gauge for picking bottoms," he said.

The volatility index was trading just a hair above the 10 level in Wednesday trading.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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