WHEN THE VIX IS HIGH, IT’S TIME TO BUY
And when it’s low it’s time to go. Or is it?
For readers not familiar with this investing Wall Street “wisdom,” good for you—your life is infinitely better. The VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. It’s meant to show the market’s expectations of 30-day volatility for the S&P 500. There’s nothing wrong with the index; it’s forward-looking and well constructed from a range of S&P 500 index options—both puts and calls. And it pretty much does what it’s supposed to do—tells you the market’s expectation for future volatility.
But that’s it! Volatility is volatility. It doesn’t tell you where stocks are going to go next—similar to the problem with beta (Bunk 19). But folks who read charts like carnival fortune tellers read tea leaves (and with about as much success) say you can replace “volatility” with “fear.” The VIX is sometimes called “the fear index.” So a spiking VIX means spiking fear. And because stocks love to climb a wall of worry, increased fear should mean capitulation selling and good times for stocks ahead. And an absence of volatility means less fear—even excess complacency—and possibly a downdraft ahead. Hence, the saying goes, “When the VIX is high, it’s time to buy. When the VIX is low, it’s time to go.”
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