The Chicago Board Options Exchange Volatility Index (^VIX, 40.93, down 5.79) rose sharply on Monday as the stock market closed substantially lower.

The VIX measures “fear” on Wall Street and moves higher as the market moves lower. When Wall Street and traders get scared, they tend to trade more and volatility, along with the VIX, soars. When traders grow complacent and content, they tend to trade less and the volatility tends to trend lower.

As you can see, the market is higher this morning which means the VIX is trading lower. Yesterday’s jump marks the highest level of the VIX since 2002 and is only the fourth time the index has been this high. I had mentioned that the VIX could be headed for the 40’s a couple of weeks ago and now that we are here, we could go much higher.

The VIX spent 10 trading sessions in the 30’s and has now jumped into the 40’s basically overnight, suggesting Wall Street anticipates dramatic price swings in market. Although we are 52-week highs for the VIX, who’s to say we can’t head into the 50’s? If the bailout bill continues to drag, it will put even more pressure on the market to get something done.

Rick Rouse