Word: markets
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Forget volatility. The VIX is a measure of the price of insurance against market instability. After all, put options essentially insure against market declines...
...options prices have fallen either because there is less demand for them, or perhaps due to oversupply as the market has been saturated by financial firms wishing to sell these options. The VIX may have continued its descent because investors do not fear a market crash enough to buy insurance at the same premium. Or perhaps more banks are writing options - selling insurance on a possible market crash...
...vary independent of the nation's health. Risk to health-insurance companies decreases as the number of policies increases; risk compounds for options writers as their volume increases. Those writing put options have secured small gains for now, but they will suffer multiplied losses across the board should the market tank...
...this precarious recovery it might take only one tremor to knock loose the foundations of this market rally, and in that sense it may well be a house of cards. The fact that insurance against that risk has gotten quite cheap should not lull us into thinking that the risk isn't there...
Bottom line: the price of insurance is not a great predictor. So enjoy the improved stock-market performance but don't put too much faith in the market's next moves just because the VIX is saying all is well...