Dow: What Happened to Volatility?

Oil, which was just under the $100 mark at the beginning of the week, has suffered a sharp decline that began Monday afternoon. The price continues to fall this morning and is now below $92. One factor pushing prices down: Saudi Arabia has offered to extend supplies to its major customers in the U.S., Europe, and Asia.

I've commented a few times in this column on the extreme levels of the VIX Index (INDEX: ^VIX  ) -- Wall Street's fear gauge. The VIX is a measure of the market's expectation of future volatility in the S&P 500 Index (INDEX: ^GSPC  ) over the next 30 days, which is derived from option prices.

One possible reason for this phenomenon: According to research firm Macro Risk Advisors, realized volatility for the S&P 500 has been higher on "up" days than on "down" days this year. That's highly unusual; stock prices, whether it be the S&P 500 or the Dow (INDEX: ^DJI  ) , tend to fall faster and further than they rise -- and may be lulling investors into a false sense of complacency. That's a dangerous attitude as politicians march the country closer to the fiscal cliff (among other risks). Still, politicians do provide some positive catalysts from time to time. Check out our must-read free report on stocks that could skyrocket after the 2012 presidential election.

Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio; you can follow him @longrunreturns. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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