VIX Climbs To Its Highest Since Early March Amid Market Sell-off: What You Need To Know

The CBOE Volatility Index (VIX), an index measuring expected volatility in the market, has climbed to its highest level since early March, when a tech meltdown triggered an across-the-board selling in stocks.

VIX Spikes: After topping out at 31.90 on March 4, the VIX began moving down and hit a low of 15.38 on April 14. Subsequently, the index saw a consolidation move, only to climb sharply since the start of the week.

It broke back above 20 on Tuesday and settled the session 11% higher at 21.84. The upward momentum strengthened Wednesday amid a pullback by the equity market.

The major averages moving Wednesday are all sharply lower amid macroeconomic worries.

A consumer price inflation report released by the U.S. Bureau of Labor showed the consumer price index rose 0.8% month-over-month in March and increased 4.2% year-over-year, the biggest jump since a 4.9% rate in September 2009.

The report showcases the pricing pressure that has come into play amid a rebound in spending following the COVID-19 pandemic and supply chain bottlenecks. A persistent inflationary environment would necessitate monetary policy tightening to rein in prices. Fears of tighter monetary policy are hurting the fledgling recovery and are apparently on traders' minds.

Tech stocks are once again leading the market decline, with the tech-heavy Nasdaq Composite Index currently down more than 300 points. The broader S&P 500 Index was last seen dipping 1.75%.

The inflation report led to a sell-off in bonds, with the yield on the benchmark 10-year Treasury note rising to 1.6770%, the highest since early April. The dollar has also firmed up.

Related Link: Commodities Futures And Inflation: What Investors Need To Know

The VIX And its Significance: The VIX is calculated from the prices of S&P 500 Index options with near-term expiration dates. It would give a one-month forward projection of volatility, which reflects the fear and greed sentiment found among market participants.

Volatility doesn't focus on directional change but the magnitude of change and how frequently the move occurs.

The VIX historically has a strong inverse relationship with the S&P 500 Index and is therefore used for portfolio hedging.

One can trade the VIX by using derivative products that track the index's price moves. Some of VIX derivatives include ProShares VIX Short-Term Futures ETF VIXY, VelocityShares Daily 2x VIX Short-Term ETN TVIXF and Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN VXX.

At last check Wednesday afternoon, the VIX was rallying 26.433% to 27.59.

Related Link: I Remember The Epic VIX Short Squeeze

(Photo: John Schnobrich via Unsplash)