The Markets Are Up And The VIX Is Down
The markets have made quite an impressive recovery since Monday’s madness when markets opened down right around 3% after a bad jobs report and currency issues caused a major selloff.
Since then, the S&P has recovered about 2% and the VIX is back in the negative… A significant difference compared to Monday’s VIX level in which it gained over 64% compared to Friday’s closing level.
But before we dive too deep, let’s talk about what the VIX is for those who aren’t familiar.
The VIX the ticker symbol for the CBOE Volatility Index. It’s a real-time market index that measures how much investors expect the S&P 500 to fluctuate over the next 30 days.
And the VIX is calculated by combining the weighted prices of the S&P 500’s put and call options for the next 30 days.
Now, people often call the VIX the “fear index” or “fear gauge” because its performance is inversely related to the S&P 500. That means when the VIX goes up, the S&P 500 usually goes down.
Investors use the VIX to measure the levels of market risk, fear, and stress before making investment decisions.
For example, when options traders think the stock market will be calm, the VIX is low, but when they expect big swings, the VIX tends to go up.
So, what does it mean when the VIX goes down like we’ve been seeing since Monday?
It means investors’ sentiment predicts market prices to stabilize some and level off for the next 30 days.
It tends to be a pretty good gauge for how much panic is still sitting in the market. Meaning if the VIX is gaining steam during a market recovery, you should be very cautious because investors are seeing the market recover but they don’t believe it.
What you want to see is the market recovering and the VIX collapsing because it indicates that the recovery is on solid ground and investors expect it to stabilize.
Now, just to be clear, I don’t like to use this as a major guide to give me a directional bias. In other words, just because the VIX is going down, I don’t think it’s a good indication that the S&P is full steam ahead; however, it tends to be a good gauge that we’re not anticipating a much deeper correction.
That’s what we’re seeing right now. Just take a look at its level compared to Monday’s:
It’s back to a stable baseline…
If the VIX continues to grind lower, we’re probably going to see the broad market grind higher.
But if you start seeing the VIX jump again before you notice any big moves in the SPY, you’ll want to be extra careful.
If you tuned into my Tucci HQ Workshop, you know that I am putting the probability of a bull run through November at about 65%…
But if you want to gauge the short term potential, I am watching the high and low of yesterday’s action:
A break on either side of this candle would give me directional confidence.
— Nate Tucci
