Something has got to give. Whether it is in commodities, currencies, equities or bonds, something is going to change direction, and it is going to be the mother of all moves. Yes, indeed.

I don’t want to bore you with ramblings about all manner of assets, so let’s skip merrily past go, to arrive at the VIX Index. The VIX is a key index to watch as it measures volatility (on options on the S&P500 equity index…but the key bit is volatility). This index is key because volatility reaches extremes at turning points and moments of utter turmoil. Case in point, the VIX hit its highest level around the time Lehman Brothers went bankrupt in late 2008 – a record since its inception in 1990 (think Goodfellas, Milli Vanilli exposed as fakes, and the release of Nelson Mandela – no ranking of importance).

But as the financial crisis has unfolded, risk-taking has returned to favor, and fear has faded. Correspondingly, the VIX has fallen, receding to pre-Lehman lows, while the S&P500 has harpooned to 14-month highs.

So what’s the big deal, you ask? Well, we are at an absolutely critical juncture as we await to see whether equity markets are indeed correct in confirming a solid recovery (by rallying, ooh, 68% since March), or whether they are just under the influence of liquidity-fueled irrational exuberance. The VIX is telling us that the market is one of the two:

So this leaves global commodities such as crude oil at historically elevated levels, while volatility is stuck in the mire. The fear is that if an economic recovery stalls, equities and global commodities will pull back, and volatility will rise once again.

Rising volatility seems somewhat inevitable, as markets seem too complacent with a recovery that is as solid as a blancmange. But just like good art provokes a strong emotion, a good chart should provoke a strong opinion, and we have to apply some faith in the fact that ‘the trend is your friend’, and this pattern could continue to play out in 2010. (but i doubt it, he screams…).