VIX volume record could be canary in coal mine

Volume of fear rising:be careful out there

Last week while speaking to a colleague, we both noted that there were quite a few ominous stories coming out that seemed to be raising the temperature of markets. I was looking at the lack of follow through on the MF Global situation by Congressman questioning JP Morgan Chairman and CEO Jamie Dimon but there was also the speculation on whether or not the Federal Reserve would announce a QE3 (they continued their Twist program) and stories regarding the imminent downgrade of many of the  world’s largest banks by Moody’s

I mentioned this to my wife, who is never too interested in the markets and she chided my tunnel vision pointing out that the world was going crazy with the U.S.  Attorney General on the cusp of being held in contempt of Congress, chaos in Egypt and the Sandusky trial awaiting a verdict.

There are similarities in all of these stories in that there seems to be a rising tide of anxiety and perhaps a breakdown in our faith in institutions and assumptions of normalcy.

If there is one stream that runs through these stories, it is fear and a feeling that institutions we have trusted may not be deserving of such trust.

So it was no surprise when I saw a press release this morning from the CBOE Futures Exchange pointing out that futures on their Volatility Index (VIX), also known as the fear index or fear gauge, set record volume last week.

And while the index itself is nowhere near its all-time high, near 90, from the fall of 2008 or last summer’s spike, near 50,  or even the high from earlier this month; the fact that more people are trading “fear” has to mean something. The index, which often simply acts with perfect negative correlation to the equity markets, was actually down for the week closing at a benign 18.11 after spiking to 27.73 on June 4 when  the S&Ps dropped more than 10% from its near four-year high on March 26.

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