As noted earlier in the week, the VIX's recent fall from its intraday peak of 56.74 on July 24 has been cited by many observers as evidence of renewed bullishness among investors. But things aren't always as simple as they first appear. "In no way do I see bullishness rising because of the
fall of the VIX," said one options trader, who requested anonymity. The trader observed that a higher VIX, such as what occurred in late July, happens as mutual funds look to "dump stocks in a capitulatory manner." Brokerage firms with which the funds place those sell orders commonly buy puts ahead of those sales, he suggested. Hence, the VIX goes up. "Huge moves in the VIX only occur because major brokerage firms are taking down some size of stock," the source continued. "As the market lifts they sell their inventory and it is only natural for them to unload the puts as well." Without quibbling about the morality or legality of brokerages effectively front-running their clients (nor explaining why a proprietary trading desk might not use cheaper alternatives such as futures to hedge big inventory), he summarized thusly: "A rising VIX suggests only that the market has been going down. A spiking VIX suggests only that the market is experiencing massive but unsustainable amounts of selling. In short, don't overanalyze the VIX. It simply reiterates what is going on in the market." Maybe, maybe not. Either way, there's an ongoing debate about the meaning, or lack thereof, of the VIX's recent fall from its July heights. ( Tuesday, the CBOE Market Volatility Index rose 1.4% to 32.73 as stocks slipped.) most active list. While not advocating that investors ignore the VIX, Lerman also advised against reading too much into it. He also observed that while the VIX is down from its recent peak, it is "still high, statistically speaking." In March, I examined this argument, which basically states the VIX got inflated along with stocks during the 1990s bubble, and is going to revert to its long-term mean in the high teens to low 20s. Citing this, many optimists suggest the VIX's recent decline is thus not a sign of complacency's return. But that's "precisely, absolutely" what the bulls said in July and August 1981 and more recently in April and May 2002, according to Bernie Schaeffer of Schaeffer's Investment Research in Cincinnati. Schaeffer passed through San Francisco this week and (over lunch at the -- ahem -- Four Seasons Hotel) we chatted about the VIX, and why its recent history makes him skeptical the 5-week-old rally in equities is anything more than a bear market dalliance.