This article caught my eye because we follow the VIX on a regular basis and while it can be a good gauge of investor sentiment some of the assumptions made when the VIX is as low as it is (currently just above 11) are not correct. When we see the VIX at low levels we understand that investors are complacent. This is correct. However people also assume that since the VIX is at these low levels that in the short term (1 – 2 months) it will move up. The article below uses historical data to point out that the increases in the VIX are no great then when it is at a much higher level.

I think we all need to understand that typically sentiment in the general markets very rarely changes in an instant for the long term. Investors can get scared and this can lead to short term sell-offs. However after these sell-offs investors will use the drop as a buying opportunity and push the VIX right back down. This is why when we have markets continuing to challenge all time highs playing the VIX needs to be a very short term bet. Personally I am waiting for the VIX to drop down to just above the 10 point level to put some money in a volatility ETF. I would not expect to hold this position for more than a couple weeks because until the overall sentiment changes and we truly start to see fear creep into investors minds the VIX will be right back to the low teens again.

Have a read below and let us know what you think about the data presented by the author Mark Hulbert.

If the stock market is about to top out, it won’t be because the VIX is currently so low.

The VIX, of course, is the CBOE Volatility Index VIX, +0.70%  , which is widely considered to be a gauge of investor fear. Last Friday, as the S&P 500 SPX, +0.00%  and the NASDAQ COMP, +0.25%  hit new all-time highs, the VIX dropped to an extremely low 11.18 — suggesting a remarkable degree of investor complacency.

This is a worrisome sign, according to the weekend reports from many of the close to 200 advisers I monitor on a regular basis. The worry warts interpret the VIX in a contrarian way, which means that they believe this widespread absence of fear is a bad sign.

The stock market’s performance following low VIX readings is no worse, on average, than it is after higher readings.

But the historical data do not support their interpretation of the VIX. The stock market’s performance following low VIX readings is no worse, on average, than it is after higher readings.

The chart above tells the story, courtesy of data from the CBOE back to 1990, which is how far back the exchange has calculated the VIX on a daily basis. Notice that the stock market’s return whenever the VIX falls below 12 is virtually the same as it is whenever the VIX is above its historical median of 18.6.

These results are hard to square with the contrarian interpretation of the VIX.

These surprising results were the subject of recent research published by the National Bureau of Economic Research: “Volatility Managed Portfolios,” by two Yale University finance professors, Alan Moreira and Tyler Muir. Coupled with another pattern they found in the historical data — periods of high volatility tend to be clustered together — they reached a surprising conclusion: Investors should be able beat the market by reducing their equity exposure whenever the VIX spikes upward, and restoring that exposure whenever it drops back.

Not only will investors beat the market, furthermore, they will sleep more easily at night. That’s just the opposite of what contrarians for years have been arguing about how to follow the VIX, of course.

Because the VIX is so low right now, the professors’ research means that investors should be giving the stock market benefit of the doubt. It’s when the VIX spikes upward by a large amount that we should become worried.

For more information, including descriptions of the Hulbert Sentiment Indices, go to www.hulbertratings.comor email mark@hulbertratings.com