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New Investors: Trying to Gauge Market Volatility? Look at the VIX Index

Have you ever wondered if there is a way to measure the volatility of the stock market as a whole? The answer is yes. The TSX created an index just for that purpose. Let’s take a look.

The S&P TSX 60 VIX Index (VIXC)

Investors can find out how volatile a particular stock is by looking at its beta. For example, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has a beta of only 0.71, meaning it is less volatile than the overall TSX. But sometimes you may wish to know how volatile the market as a whole is. The Chicago Board Options Exchange (CBOE) in the U.S. has long kept track of overall U.S. market volatility with its VIX index. The VIX looks 30 days ahead to estimate market volatility. It is considered a helpful tool to predict the potential downturn of an entire market and gained attention during the Financial Crisis that started in 2007.

For a long time, Canadian analysts and investors simply looked to the U.S. index to gauge our own market, as it was assumed the Canadian and U.S. stock markets usually moved in tandem. However, Canadian stocks don’t always behave the same way as U.S. stocks, particularly since the TSX is so heavily weighted with commodities. So, in 2010, the TSX created the S&P TSX 60 VIX Index to specifically look at the Canadian stock market. This index looks at the volatility in the share prices of Canada’s 60 largest companies (by market value). It works the same as the U.S. index, except it is based on the Montreal Option Exchange instead of CBOE.

The VIX generally has a negative correlation with the stock market. When one goes up, the other goes down. If you look at the VIX performance over the last six months, there have been a few points where it looks similar to the TSX as a whole, but overall when the VIX has been high, the TSX has been low, and vice versa. For example, in early September the VIX was at a low of 4.63, meaning it predicted little market volatility. The TSX was down at 883.26 at that same time, then it immediately moved into a steady increase over the following month. It followed the pattern over 30 days predicted by the VIX.

A high VIX means there is a greater chance of market turmoil, as a rising index means investor fear is rising. The index also tells us if options are cheap or expensive, as higher volatility means higher premiums for options.

If you want to keep track of how the VIX is doing, use the symbol VIXC on any site that provides stock market data, such as Google Finance.

Investor takeaway

There are many figures and indexes you can follow when trying to gauge the stock market. The S&P TSX 60 VIX is a helpful index to watch when you want to gauge overall market volatility.

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