VIX

Smart Money Confidence is a model that aggregates indicators reflecting sentiment among investors that tend to use the stock market to hedge underlying positions. Or, they're just contrarian investors who prefer to sell into a rising market and buy into a declining one.

Time Frame: Medium-Term | Update Schedule: Daily | Source: CBOE

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Construction:

The VIX measures the implied volatility (i.e. estimated future volatility) of near-term at-the-money SPX (S&P 500) index options (click here for an excellent overview of options by the CBOE).

If the SPX moves significantly, new strike prices are used to calculate the VIX. Since there is a skew to options prices and implied volatility changes with the strikes, the VIX will typically rise when the market drops and fall when the market rises. This is not always the case, but the correlation is clear.

The common interpretation of VIX movements is that the VIX will rise when fear or uncertainty does, since there will be a greater demand for put options. Conversely, when the market is rising, that typically creates complacency on the part of traders and the VIX will fall as the demand for put options decreases.

While the range within which the VIX tends to travel can change over time, when it drops below 12%, it can be showing excessive optimism, and when it is above 30%, it shows excessive pessimism.

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