Since the crash of 2008, the VIX has become the favorite "fear gauge" of TV pundits and individual investors. But like many other indicators, they are best used when reinforced with other data. In other words, you can't look at the VIX in a vacuum.
I bring this up because many are pointing to how the VIX is cheap and how it isn't reflecting any fear yet-- this isn't exactly true, when you look at some other readings. There are many charts you need to watch alongside the VIX; 4 are mentioned below:
SPX Options Skew
Remember, the VIX is simply a normalized 30 day reading of the demand for SPX options. But that number in and of itself doesn't tell the entire story. To do that, you need to look at the premium of each SPX option. The higher the premium, the higher the implied volatility-- which means investors are paying up for protection. You can also see how the skew is-- the skew shows how much higher the premium of OTM options are being bid up. The steeper the skew, the higher the fear. Also, you need to watch how premiums are being bid on different months.
RVX - the Russell Volatility Index
Since the SPX only shows the S&P, it isn't indicitave of the full risk in the market. The RVX measures the supply and demand of RUT options-- smallcaps. This generally has a higher reading than the VIX because smallcaps are supposedly more volatilie than the S&P. You can draw some interesting conclusions when comparing the two charts.
The VIX only measures volatility on a normalized 30 day basis; however, it might be worth a look to see how longer term options are behaving. You can view this directly through the SPX options skew, but VXV is a quick reading of 3 month (90 day) vol readings.
This chart is a little hard to come by as I don't have a bloomberg terminal, but you can graph it yourself by pulling data from the CBOE VIX website. When the curve is steep, it tells us that there is an expectation of more volatility further out in time relative to the near term expiration.
So what does all this mean? Volatility really isn't that cheap-- if you want to protect yourself in the short term, I guess it's a little inexpensive, but if you want to roll your protection further out in time, it's going to cost you as the premiums are a little higher. So this isn't a bearish sign (yet).