The VIX index, or fear indicator as it is known, is an indicator created in 1993 by the CBOE (Chicago Board Options Exchange) that measures the volatility of future 30-day contracts made on the SP500. A futures contract consists of buying or selling a quantity of goods or securities at a certain date (in this case, 30 days) at a fixed price. And all this that means? Well, thanks to these future contracts, the VIX can measure the variation that the markets expect the American stock market will have in the next 30 days.
Throughout all these years, there has been a great correlation between the VIX index and the SP500. As you already know, the SP500 is an American index that has a great impact on the rest of the world stock markets. If the SP500 falls, the other bags fall, as if it goes up, the other bags go up.
Why is the VIX index so important?
The VIX index is very important because it is telling us the market sentiment on the world stock market.
When we have a very low VIX index, it means that the volatility is very low and therefore there is no fear in the market, which causes the stock markets to continue rising timidly. The big drops in the bags come when a VIX is very low and starts to rise.
On the contrary, a very high VIX means that the volatility is very high and that translates into nervousness in the market. For this reason, it is known as the “fear indicator”. When there is nervousness in the market, the stock markets move with a lot of volatility. Large increases occur when a VIX is very high and begins to fall. Therefore, we must take advantage to buy, since it is considered that the stock markets are undervalued by the fear of the market.
How do we know if the VIX is high or low?
The main problem we have with the VIX index is that it is not an indicator in itself, but an index. Therefore, it cannot be used as an indicator that gives us points of entry or exit in values.
There is no exact figure to indicate if the VIX is high or low but many analysts say that a VIX below 20 means that there is optimism and relaxation in the markets while a VIX above 30 means that there is fear in the market and we must be cautious with our operations.
How has the VIX behaved to the past?
In the following graphic, I leave you a relationship between the VIX and the SP500 (orange line).
History of the VIX index
As can be seen, there is a clear correlation between the VIX and the SP500. The big falls of the VIX are related to strong increases of the SP500 and vice versa. If you look, when the VIX turns, the market does too, so we can use this index to know if the markets are optimistic or pessimistic. This is not enough to decide the points of entry or exit.
Where can I see the VIX index?
From the tradingview website, you can create a free account and follow the index in detail.
How can I orient myself with the VIX?
While the VIX is falling, the bags will go up. For this reason, when the VIX is very low without a lot of falling margin, it is necessary to pay attention to possible turns, since the falls in the stock market will be very large. On the other hand, a VIX that is going up a lot means that the stock markets are falling … so if the VIX reaches very high levels and turns around, it is necessary to be waiting to enter an undervalued market.
And how is the VIX right now?
Well dangerously low. We are at 9.61 points. These figures are not seen since 1993 and it takes a while.
Does this mean that the bags are going to fall right now? No, it means that the bags are calm and continue with their shy rises without fear. Can we then buy quiet? Quietly, no, in fact, it is dangerous, because if the VIX turns and starts to rise, the bags will begin to fall and with great force. As we already mentioned, the VIX index does not say when the bags will be turned over, but it shows you the market sentiment.