By J. Helen Yang, CFA
Note: This blog was written on January 19th, 2018, before the correction started on January 29th. Click here for the events between January 29th to February 5th.
You have been enjoying the ride since 2009 but can’t help wonder if there is a bubble going on, and more importantly, if it is going to burst anytime soon.
If you watch the S&P 500 index climbing “dangerously” high, it sure feels like it could crash anytime. Some people predict that a crash is due in 2018, because there was one in 1987, 1997,2002 and 2007 respectively, and now it is time. Predictions like this should always be taken with a grain of salt, but I am paranoid enough to check the market “barometer” every day.
What exactly do I check every day? The VIX index. Also called the “fear index”, the VIX measures how volatile the market is. This is what the VIX looks like for the week of January 15th – 19th, 2018.
With the VIX at 11.43 on January 19th, 2018, I am fairly comfortable that the bubble is not going to burst in the immediate future because it is well below the long-term average, which is 17 for the US stock market.
(Author’s Update: Things got very interesting shortly after this blog was written. From January 29, 2018 to Feburary 5th, in a matter of one week, the VIX rose sharply. As of market closing on Feburary 5th, the VIX stood at 37.32, doubled in one day.)
This is what the VIX looks like in the last thirty years. You can see that how low the volatility is today compared to its value historically. You can also see how it spiked in 1997, 2002 and 2008.
Keep in mind that the volatility can spike up anytime. If you are worried about a crash coming soon, check the VIX every morning and noon to give you the peace of mind at least for the day. And better yet, set up an alert on live.andeswealth.com so you can receive a notification when the VIX is higher than your threshold.
Data source: Google Finance and Yahoo! Finance