Back in September, we ran a chart of Wall Street’s most common gauge of investor fear, the “VIX.” This index tracks the price people are willing to pay for protective stock options, aka “portfolio insurance.” We pointed out how folks just aren’t scared of risk anymore. They’re becoming less worried…
Folks in the insurance industry can tell you an interesting thing about their business. Their customers are most willing to buy insurance against earthquakes and hurricanes right after a disaster… right when prices are high. This is when the threat is fresh in the buyer’s mind. Most folks aren’t much interested in buying insurance when things have been calm for a decade… when insurance is cheap.
This phenomenon is at work in the VIX right now. As you can see from today’s chart, the VIX reached a “super spike” point around 80 in December 2008. As billions of government dollars salved the wounds of the housing crisis, the VIX drifted lower and lower all last year. And just in the last several trading sessions, the fear gauge dropped below the 20 level. Investors aren’t much concerned with risk… and “insurance” is cheap.
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