Using The VIX To Time The MarketBy datatrekresearch in Blog
The S&P 500 is down 17% since the start of 2022, but there have been many trading opportunities over the last 15 months. The key question for both short term traders and longer-term investors has been, and continues to be, “How do I identify good entry/exist points?”
At DataTrek, we have relied on the CBOE VIX Index to provide clients with reliable answers to that question. Our approach is strictly quantitative:
- The long run average for the VIX back to 1990 is 20.
- The standard deviation around that mean is 8 points.
- When the VIX closes above 28 or 36 on any given day, we are 1 and 2 standard deviations away from the average VIX reading. That tells us expected “fear” is high enough to consider going long.
- Conversely, when the VIX closes at 20 or below we know markets have become too complacent about the many challenges still facing US equities.
The chart below shows the VIX since the start of 2022. We have broken up the data into periods when the VIX moved from 20 (its long run average) to 30 or higher (an easy round number that is close to the 28 levels described above) and then fell back to 20, separated by dotted black lines. The red/green numbers above the VIX line are the price returns for the S&P 500 over those periods.
The correlation between S&P price returns and the action in the VIX is very strong. Whenever the VIX goes from 20 to 30+, US large caps decline. When the VIX moves lower from the 30+ level back to 20, stocks advance. Note that the most recent period, from early December 2022 to now, has not seen the VIX give a “Buy” signal and the S&P 500 is actually down 3 percent over this period.
Those of you who trade intraday probably know that the VIX opened at 30.6 on March 13th and also got very close to 30 around midday on March 15th. In each case, those were good entry points for traders looking to get long. The S&P 500 is up 3-4 percent since the VIX gave those 2 short-term “Buy” signals.
Takeaway: The CBOE VIX Index is a productive way to consider when markets are oversold or overbought and gives both traders and investors a way to navigate a still uncertain US equity market. For all the recent chatter that the VIX is “broken”, the data we have discussed in this note proves it is still a relevant, useful, and entirely free way to assess market sentiment. While no one market indicator is ever 100% right, we think the VIX is still an important tool for all market participants.
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