The movement in the VIX is something to pay close attention to, as it can provide an important warning of potential trouble for the stock market. 

The chart below is a long-term look at volatility and the S&P 500.  The black line shows the S&P 500 Index and the red line shows the S&P Volatility Index.

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Note the last period of sustained low VIX (from the years of 2005 – 07) that preceded the 2008 financial crisis.  It is worth noting that prior to the index making its high in 2007 and then rolling over, the VIX had perked up from sustained low levels and had been maintaining readings above 20.  These readings in the VIX were multi-year highs at the time and came ahead of the major price damage and sharp drop of nearly 50% in the S&P.

The recent readings in the VIX are again creeping above 20.  If the VIX continues moving higher and maintaining readings above 20, while the S&P 500 continues to work lower, investors should be vigilant about taking protective actions on stock portfolios.

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