VIX auguring pain?

VIX is the most prominent barometer of risk that is available in the market. Many banks tried to bring in their versions of risk barometer with much fanfare but failed to impress the market. VIX is still the most preferred indicator whether it is VIX of S&P 500 or of Indian Nifty.On Thursday Nifty VIX registered 16.4 which is the lowest since September 6th, 2010 the day it closed at 15.2.

VIX of S&P 500 too registered the lowest reading of 15.4 since March 27th, 2012 on last Thursday though on Friday it gained some and closed at 16.3. Nifty VIX and S&P 500 VIX as shown in the chart below are tantalizing close, volatility parity! Since its inception Nifty VIX has been at discount thrice and all these instances occurred during high volatility regime. The reasoning is that the US economy is so precarious that any gloomy news leads to surge in insurance premium and overshoot that of India’s.Hence unless we see any larger crisis the spread between Nifty VIX and S&P 500 VIX should widen going forward.

Nifty VIX is currently close to its historical low and hence the chance of VIX reverting to its mean is high. The low VIX reading turned out to be a prescient for the strong rally in the month of September 2010 and the rally was fuelled by strong buying by FIIs. In July 2012 we can’t ignore the dejavu of low readings by VIX and money flow from FIIs but the factor that undermines these sentiment boosters is the weak volume. Despite strong FII inflows in the month of July the volume has been steady decline.