The VIX or CBOE VIX Index
Is also known as the fear index!
The VIX or CBOE VIX index is the volatility index of the Chicago Board Options Exchange and has become the benchmark for short-term (30-day)forecasts of market volatility.
Market volatility is related to the amount of fear in the market when there is a market downturn and to the amount of greed when the market is in an uptrend. It is somewhat problematic to suggest that volatility is related to risk.
Using The Vix Index For Market Timing
The Vix, or Volatility Index, can be used to time buying and selling decisions. This market timing system was developed by Larry Connors and has become known as Connors VIX Reversals.
It is mainly used to trade the S&P Futures and Spiders (SPY), but it can be used to identify when the overall market (S&P 500) is likely to reverse.
It is suggested that it be used in addition to other market timing strategies when making decisions to buy and sell.
In downturns previous to the global financial crisis (GFC), as the VIX indicator rose close to 48 (increased fear), it was taken as a signal that the stock market was bottoming out and was seen as a sign to buy.
However, when the GFC hit in October 2008, the CBOE VIX rose above 89. The increased level of fear was not that the US market might not recover but that the global financial markets were about to collapse.
Larry Connors has a guide that provides 10 strategies to trade the VIX. He claims that over more that eight years Connors VIX Reversals have correctly predicted the direction of the Standard & Poors (S&P) indexes approximately 65% of the time within a two- to three-day period.
Many global stock markets have their own VIX-like index that is related to their own market indexes.
To Conclude ..
The use of volatility as a measure of risk is less than ideal. While it might correlate well with the level of fear or greed in the market at any time, risk of loss from investment in particular companies can be better estimated using other indicators.
Downside risk, as estimated by followers of value investing, relates more to factors such as ...
- the high quality of management
- the low level of debt held by the company
- the low level of capital requirements and
- a history of high return on equity.
Companies with these characteristics are the first to bounce back after any downturn in the markets.
So if you were to ask me whether I follow the VIX, the answer would be no. I get a measure of the current fear or greed in the stock market by reading the financial press/
Return from VIX Index to Safe Investing
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