Has India VIX Lost its Significance ??

India VIX or the Fear Index as  it is generally known, used to indicate "Fear of Highs" is at its all time low for Nifty.The reason that the VIX  is so low because either everyone is bullish about the stock market or they are being ridiculously complacent about the downside risks. Maybe this is part of the story but there is a bit more to it - A low VIX could lead to lower premium on puts used to buy downward protection.

Generally, the VIX is supposed to be negatively correlated to the indices, but in the context of Indian markets, which are witnessing a structural bull phase, the relationship seems to have been lost. India VIX no longer can be used as a reliable tool to forecast market direction as can be seen from the  following chart. The previous two highs in India VIX in September 2013 and May 2014 have been followed by fresh uptrend in Nifty. Similarly, the VIX bottom during March 2014 have resulted in fresh market breakout. So does the current all time low in India VIX indicating a fresh uptrend ??

The fact is that the VIX is not an "Fear Index " and never has been. It's a just a measure of  options premium.  As the markets go up, volatility increases and so does the risk premium as the investors and fund managers rush to insure the downward risk in their portfolios. However, as the market becomes stable at the higher levels, the fear of FALL recedes and VIX falls and so does the option premium.  The VIX DOES NOT lead the equity market, it follows it.

The fall of India VIX

Traders were flummoxed by the sudden fall in India VIX from 38-39 levels to 29-30 levels, a fall of almost 25%. More so, because everyone expected the VIX to remain high till 16th May and even after, till the formation of the new government.  In fact many predicted the VIX to touch even 45 levels.

In our earlier post  India VIX   dated  April 25, 2014, we had predicted the VIX to rise after it had corrected to 31 from 37. It did rise thereafter to 38-39 levels only to fall back to 30 in a sudden and sharp move. This fall was not accompanied by any fall in the Nifty indices.

The VIX daily TTO chart below shows how hourly VIX had developed a negative  divergence and fell below the daily trend even while the VIX went up to touch new highs of 38-39. This explains the sudden fall in VIX which is likely to take short term support at 31 and any fall below is likely to take it to 24.

The sideways move in VIX may continue for sometime till the entire short term correction plays and is ready to move up again in near future. In the following weekly TTO chart of VIX, the trends have a aligned in a  bullish formation which indicate the possibility of the VIX rising higher once the short term correction plays out. Traders can position themselves for the next upmove.

Positive Correlation with Nifty 

Since the inception of India VIX this is the first time where the VIX has developed positive correlation with the Nifty i.e. a rise in the indices is accompanied by a rise in VIX. In all previous occasions, the fall in Nifty was accompanied by a rise in VIX.

India VIX

India VIX has shot up in April touching the all time high of 36-37. Presently at 31 the VIX is likely to go up further in the coming days.