Volatility

Volatility is one of the more important indicators for a serious investor to follow . Volatility is a measure of risk .... the Higher the Volatility -- the Higher the risk .... the Lower the Volatility -- the Lower the risk . Volatility is also a key factor in determining valuations in options and derivatives ( see Black-Scholes modeling ) .

Why is this significant ? As a determinant of sentiment , "fear" and "greed" are very important to the underlying psychology of a particular stock or index . Knowing how the " crowds " think and act can help an investor act appropriately ( usually contrarian ) rather than follow the lemmings off the cliff.

Two of the more popular Volatility indices in the Equity markets are the VIX -- which measures Volatility in the S&P 500 , and the VXN -- which measures Volatility in the NASDAQ 100 . These indices are thought of as "reverse " indicators . They usually move in the opposite direction of their underlying index . When fear abounds , the indexes will fall and the Volatility indexes will rise . When fear subsides , indexes will rise and Volatility falls.

When Volatility rises to extremes , it usually signifies a panic selling mode , and signals a " Buying " opportunity . When Volatility falls it usually signals a "complacency " and a rising market , and can be used a " Selling " opportunity .

What are the Volatility indices implying now ? A possible topping out of the market -- it may be time to be cautious and defensive in investing , and even selling some overextended positions .