Does a softening VIX foretell better days?

After the major bounce-back in indices, one question that marketmen are asking is whether the worst is over for the markets. If one goes by the clue from the volatility index — the India VIX — one can assume that the worst may be behind. The volatility index of the NSE has fallen sharply in the past few days.

From a high of 83.61 on March 24, the fear gauge has cooled considerably to hit 51.80 on Tuesday.

The volatility index captures the expected movement — upside or downside — of the underlying index over the near term. According to studies, the equity volatility gauge moves in the opposite direction to the underlying index about 90 per cent of the time.

The India VIX was hovering around 14-15 level till mid-January, when the Nifty was swirling well above the 12,000 mark.

However, analysts have cautioned investors not to read too much into it. “Though it has corrected sharply, it still rules above the 50-point mark, which still a cause for concern,” an analyst working with a domestic brokerage in Chennai said. Only a fall below 35 can give some comfort, he added.

It may be recalled that the India VIX hit an all-time low of 8.7 in May 2008, during intra-day trading. The fear gauge touched a high of 92.53 on November 14, 2008, when the bear market was at its peak. In the current phase, the volatility index hit an intra-day peak of 86.63.

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