The Volatility Index (VIX) is widely considered the foremost indicator of stock market volatility and investor sentiment. It is a measure of the market’s expectation of near term volatility of the prices of S&P 500 stock index options.
Since its introduction in 1993, the index has grown to become the standard for gauging market volatility in the US stock market. This has earned it the monikers ‘fear index’ and ‘fear gauge’.
In 2003, encouraged by the ever-growing significance of the index, the issuing bodies updated the VIX to reflect its benchmark status. The VIX is now based on a wider index, the S&P 500, allowing for a far more accurate depiction of expected market volatility.
Understanding the VIX
As a volatility gauge, the VIX generally portrays investor fear or complacency. The typical indicative value is 30. When the VIXX reading is above 30, it implies high volatility and inherent fear in the market. On the other hand, when the reading is below 30, it denotes complacency, or rather, less tense times in the market.
In highly volatile times, investors usually exercise increased caution in the markets and vice versa. This innately inversely correlates the VIX with the S&P 500. When the S&P 500 goes down, the market interprets this as fear in the market, which consequently pushes the VIX higher.
Still, the VIX measures volatility, and does not necessarily indicate future market direction. Historically, the VIX posted its all-time high of 80.86 on November 20, 2008, which was during the global financial crisis. Its all-time intraday low of 8.56 was posted on November 24, 2017, and the fact that it was Black Friday probably helped impact the VIX