Volatility is plunging as stock prices rise

Volatility index, a measure of the standard deviation, or how much the stock market is expected to change in the coming year is down below 16%. This has led to an increase in stock prices.

The VIX uses options pricing to measure the market’s expectations for future swings in the S&P 500. It tends to fall when stocks rise. The VIX came close to 50 last summer when stocks were swooning and many were fearing a double-dip recession. It was also over 30 as recently as early December. But the VIX has had a relatively smooth ride lower throughout much of 2012.

If volatility comes back (a measure of risk), expect stock prices to fall to compensate new stock purchasers for bearing the additional risk.