VIX index and the Stock Market
By Paul Reid
04 January 2024
When there is pressure on the stock market, the high VIX level is frequently mentioned in the analysis paper. The phrase "fear and greed index" is typically linked to the VIX level. But it's not generally discussed why the VIX tends to increase during times of pressure on the stock market as a whole. When there is a greater demand for option contracts than there are available, the implied volatility of option prices increases. There is typically a rise in demand for option contracts when market pressure increases. We'll discuss the connection between panicked demand for option contracts and their rising supply. Next, this idea will be developed further, and it will be explained how some traders use the VIX as a technical indicator.
US500 vs VIX index
After examining the correlation between the US500 and VIX indices on the chart above, notice that the S&P 500 and the VIX line charts mirror each other during the 2020 Recession and most of the time during the observation. This is why some investors keep an eye on the Volatility Index when markets signal an approaching recession.
What does the current VIX index level tell us?
Currently, because the financial market hopes that the Fed is likely to stop the hiking cycle and that the Fed itself has a more dovish tone, US equities rebounded again, causing the VIX index to plummet.
However, given the numerous concerns surrounding global markets, such as Yield Curve Inversions, high US Public Debt to GDP, and Low US equities risk premium to UST, the present moment appears opportune for investors to stay away from Wall Street and instead concentrate on wealth preservation. Always, CDs and US Treasuries have been the most secure investments. Given the current favorable interest rates and the escalating risk associated with the stock market, it is prudent to allocate a substantial portion of each portfolio towards fixed-income securities.
Keep your eye on the VIX. In general, a rise indicates a precipitous market decline. Although the reliability of these signals is insufficient to establish a forward-looking indicator, the VIX exhibits a tendency to mirror the S&P 500 in certain aspects, particularly in times of market turmoil.
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.