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What does Volatility Index (VIX) reading above 20 mean?

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a good way to gauge just how volatile the market is. The rockier the markets, the higher the VIX will read.

In the past week, it has been at its highest levels since the summer, topping the 20 mark yesterday and today. The inability of Congress and President Obama has led to a lot of investor uncertainty, and that uncertainty is translating into a lot of volatility.

The VIX was hovering between 15 and 18 for the latter part of the year, but over the last month we have seen it shoot higher, and today it is up another 3.5% to 20.15.

While breaking through the psychological 20 barrier is a clear sign that investors are uneasy over the current fiscal cliff negotiations, it is important to remember that a reading of 20 is still not that bad. If the market was truly convinced that deal was not going to be reached and the economy was indeed going to fall into another recession we would expect to see a much higher VIX.

During the summer of 2011, when there was so much concern over the debt ceiling, and the stock market was in freefall, the VIX crossed through the 45 mark.

If we take the VIX as an indicator of what is to come, we can assume that traders still think a fiscal cliff is going to get done. Most analysts have all but accepted the fact that a deal will not be reached by the end of the year, but with the VIX trading at just 20, the overall consensus appears to be that Congress and President Obama will be able to work together and get a deal done sometime in early January.

What I take from the current VIX reading is that we are going to see some good buying opportunities in the weeks ahead. We are seeing some stocks get beat up as investors lock in profits, but if the VIX reading does prove correct, and we do see a deal in the first half of January these same stocks will see bargain hunters come back.

Don't expect to see a deal in the next few days, but be prepared to act quickly should a deal get reached and the bargains go away.

Chart courtesy of Stockcharts.com.

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va. His articles typically cover big-picture events and forecasting what impact they will have on the stock market. Follow Michael on Twitter @MFatMICenter.

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.