Please ensure Javascript is enabled for purposes of website accessibility

A Foolish Take: The Biggest Mystery on Wall Street Today

By John Maxfield – Updated Jun 12, 2017 at 5:11PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Why is the "fear index" so unusually low?

People on Wall Street are perplexed about something called the "fear index," or, more formally, the Chicago Board Options Exchange Volatility Index (VIX).

This measures how volatile the stock market is expected to be over the next 30 days. At the low point of the financial crisis in 2008, the VIX climbed to as high as 80. That's four times its nearly 30-year average of 20.

Since the beginning of this year, however, the VIX has been stubbornly, suspiciously low. The measure has closed below 10 on only 16 days since the beginning of 1990. Eight of those days have come in 2017.

Graph showing the CBOE Volatility Index since 1990

Data source: Chart by author.

This is unusual, particularly when you consider that the VIX has closed below 10 in fewer than 0.25% of trading days in roughly a quarter century.

Some people have argued that the VIX is low because investors are optimistic, and therefore aren't expecting much volatility in the coming weeks. Others have said that it has to do with the growing popularity of exchange-traded funds, which may be distorting the market.

It's impossible to say who's right. But either way, with stocks trading at record highs, you'd be excused for wondering if investors are ignoring a potential warning signal.

Offer from The Motley Fool: The 10 best stocks to buy now
Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the S&P 500!*

Tom and David just revealed their ten top stock picks for investors to buy right now.

Click here to get access to the full list!

*Stock Advisor returns as of June 5, 2017.

The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.