VIX is still not properly understood

There is a good article on Bloomberg by Jeff Kearns and Michael Tsang entitled "VIX Failing to Forecast S&P 500 Drop, Rebound Loses Followers" which discusses recent difficulties that traders have had when trying to bet on market moves based solely on VIX, the implied volatility index for S&P 500 stock futures. Sure, sometimes VIX is a rock-solid indicator of market movement, but sometimes it is not. No undex is or can be 100% reliable at predicting the future. Lately, the problem is that the impetus for market movements has not always been visible to traders who use VIX until after the fact. At best, all VIX can tell you is what people are anticipating, not what will actually happen.

Four core problems with using VIX to predict the future are 1) this is our first big bear market since VIX was changed in 2003, 2) VIX anticipates market movements based on trading sentiment, but cannot anticipate events that might also influence trading sentiment, 3) the evolution of the role of hedge funds is constantly changing the role of stock futures and options, and 4) too many people "playing" VIX can distort the relationship between VIX and the market at times.

At a minimum, volatility in hedge fund redemptions is probably also causing significant shifts in VIX that might be mistaken as trader sentiment changes rather than non-trader sentiment changes.

There may in fact be some very good strategies that are based on VIX, but it is abundantly clear that there are plenty of bad or dangerous or unreliable strategies that lure in a lot of people.

-- Jack Krupansky