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A Glimpse of Market Panic

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We at The Motley Fool don't pay much attention to the day-to-day movements of anything, but something caught my attention yesterday as particularly abrupt: The VIX, a measure of market volatility, jumped 27%. This was the 10th-highest daily climb in the past six years -- a period that includes the pants-wetting days of the 2008-2009 financial crisis.

In other words, markets panicked yesterday.

Yet as crazy as yesterday's jump was, the VIX is still fairly low, historically speaking:

Source: Yahoo! Finance.

Since the VIX began in 1990, the average reading is 20.4. After yesterday's surge, it closed at 20.8. It’s weird when something can surge by more than a quarter and still be about average.

This simply shows that investors were fairly complacent up until yesterday, ignoring the odds of something bad happening -- oil shocks, Middle East uprisings, that kind of stuff. Complacency breeds stupidity. Stupidity breeds losses. Sure enough, companies like Citigroup (NYSE: C  ) , Yahoo! (Nasdaq: YHOO  ) , and Southwest Airlines (NYSE: LUV  ) fell between 4% and 5% on either no news, or what should have been unsurprising news. Hewlett-Packard (NYSE: HPQ  ) fell more than 12% after hours after beating earnings expectations.

Yes, oil prices surged yesterday. Yes, there's uncertainty in the Middle East. But these things happen all the time, several times a year. When markets capitulate on news that shouldn't be terribly surprising, it's a good indicator that the rally which brought the VIX to its complacent levels probably went too far.

What's it mean going forward? Who knows? The VIX is actually a poor indicator of future returns. It tells you what just happened, not what's about to happen next.

What do you think might happen next? Sound off in the comments section below.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Southwest Airlines is a Motley Fool Stock Advisor selection. Yahoo! is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (12)

Comments from our Foolish Readers

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  • Report this Comment On February 23, 2011, at 3:08 PM, bottomfisherman wrote:

    Its funny how something can happen in an insignificant country like Libya that is not a major supplier of oil and world markets panic and people start running around like the sky is falling. It is no wonder that people who are not familiar with investing or the strategies needed to become a successful investor think that the Stock Market is little more then gambling. I am taking a shalaking today and am laughing it off because I know better. I also saw it as an opportunity to buy and did just that this morning.

  • Report this Comment On February 23, 2011, at 3:22 PM, cn01 wrote:

    This is a beautiful opportunity to buy. I believe the market will go up again as soon as Libya becomes old news, possibly even before. A dip was overdue--this is it!

  • Report this Comment On February 23, 2011, at 5:34 PM, kjordan3637 wrote:

    Yes, there is no reason to short at this level. A short may come, but uptrends are still in place. If you are trying to predict the future, you will lose. Right now the market is still on it's upward path. A short will come when that path changes.

  • Report this Comment On February 23, 2011, at 5:45 PM, Vismxr wrote:

    Thank you Mr. Market for more buying opportunities today!

  • Report this Comment On February 23, 2011, at 7:47 PM, TruffelPig wrote:

    I think the past 2 days were nice to test some recently acquired stocks in hot water. Ford in my opinion failed and I got rid of it. I think F will fall even further. Midday when stocks started recovering I got VALE near the support. Doubled my position in it. Also got some cheap Micron. Excellent. Yesterday I wasn't amused, but today I nearly made up for the losses. I also invested in some alternative energy stocks. Wind energy specifically.

  • Report this Comment On February 23, 2011, at 9:27 PM, GrumpyOldGuy wrote:

    You're joking, right? This was about as far from panic as a (two) down days in the market can be.

    The big investment houses control VIX and they do what they do best, trade stocks for small incremental gains.

    Investors did what they do best, had a cup of coffee and went to work.

  • Report this Comment On February 23, 2011, at 10:49 PM, topsecret10 wrote:

    You have not seen anything close to the "panic" thats going to happen when all of the "pros" begin to realize that not only are we still In a recession,we could see a depression as oil,commodities,gold,silver,wheat,corn,sugar,cotton,etc.... oh.... gas,food.... housing double dipping, 20% REAL unempoyment .... you get the picture.... :) TS

  • Report this Comment On February 24, 2011, at 1:44 AM, buddyglee wrote:

    topsecret10 u have a good point there

    if something as meaningless as lybia protesting causes people to panic. Imagine what a real problem would cause people to do.

  • Report this Comment On February 24, 2011, at 8:38 AM, schoenyman wrote:

    Could it possibly be the protesting in the streets at our states capitals? Why look at Libya and ignore what is going on in our own country?

  • Report this Comment On February 24, 2011, at 11:28 AM, MonkeyRx wrote:

    I fully agree that short and long term investors may have reason for concern due to the ripple effect in the middle east. True, Libya is not a major oil contributor, however, current instability there began with Egypt and if the ripple continues to other oil producing countries we may have some reason for concern. Oil prices effects every company either directly or indirectly. I have no doubt this creates great buying opportunities that I AM going to exploit, my only question is do we sell a little here to have purchasing capital when the market goes lower? Or simply keep current positions and add to them? Anyone care to share their strategies?

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