Keep an eye on volatility index India VIX 

The Indian stock markets are on fire and are the best performing markets globally this year with both the benchmarks Sensex and Nifty up more than 25 per cent each. There are many stocks that have more than doubled this year and new investors are pouring in record numbers.

While there is a significant amount of optimism and bullishness all around in the markets, there is one more aspect -- an important one – that investors need to take into account when looking at the stock markets.

The India VIX index, which is looked upon as a barometer of short-term volatility, has surged in the last one month even as the benchmarks continued on their record-breaking spree.

In the last one month, the India VIX has moved up more than 31 per cent even as the Sensex and Nifty have gained around seven per cent in the same period.

A surge in India VIX is considered to be a signal of expectations of higher volatility in the markets. This assumes significance as a rise in volatility often leads to correction and weakness especially in stocks that are moving up mostly due to the broader exuberance in the markets and not supported adequately by fundamentals.

On Monday, the morning session saw the India VIX gain nearly four per cent to hover around 17.58. To be sure, the barometer is still miles away from its 52-week high of 29.65 but has nearly doubled from its 52-week low of 9.03.

Interestingly, the surge in the India VIX has started slowly and steadily in the recent past as the index is still around 14 per cent lower when compared to its level six months ago.

Also read: Beware of risk factors as valuations hit the roof, say market experts