Tuesday, May 24, 2011

Fear Strikes Back

Another bad sign for the near future of investing: The so-called fear gauge took a step up on Monday, rising to its highest level in two months. More formally known as the Chicago Board Options Exchange Volatility Index, it's a measure of how prices that investors pay for options on the S&P 500, which basically function as insurance against their stock positions.

The volatility index rises when investors are expecting the market to fall, and they want to hedge their bets. As recently as April 28, it was at its lowest point since 2007, indicating that investors expected very little market volatility on the horizon. But the measure jumped 12 percent last Friday, then another 15 percent on Monday.

One thing that's important to remember, though, is that this is much more an indicator of investor concern than it is an indicator of a market drop. If people were sure the market was going to decline over the next several weeks, we'd be seeing a massive sell-off.

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