The Chicago Board Options Exchange VIX volatility index, known as the fear gauge, hit a six-year high today, reaching a level that analysts said is historically followed by a market recovery.
The VIX peaked at 42.16 in early afternoon trading, from 36.10 on Wednesday. Todays reading was the VIXs highest since closing at 45.08 in August 2002, when the U.S. economy seemed about to collapse back into a recession. Over the past 10 years, the VIX has closed above 42 only on two other occasions: after the September 2001 terrorist attacks and in September 1998, due to the aftermath of the Russian debt default and the failure of the LTCM hedge fund.Based on historic data, the spike in the VIX index which typically moves in the 15 to 18 range may signal a turning point in the stock market sell-off.
The VIX is the fear index, and when it is that high, it correlates with a market bottom. Its when the fear is the greatest that the recovery is the closest, said Phil Gocke, managing director at the Options Industry Council.
The three big crises of the last 10 years had the fear index reaching the same level and being followed by strong market recovery, Mr. Gocke added. Its a positive development for a capitulation bottom.