Recently, the VIX Index has frequently appeared in people's vision. VIX, the full name of Volatility Index, is a common abbreviation for the Chicago Board Options Exchange's market volatility index. It is a common indicator used to measure the volatility of S&P 500 index options. It is usually called the "fear index", which is a measure of the market's expectations for market volatility in the next 30 days. VIX is also the stock code of this index.

VIX is also known as the fear index. As the name suggests, a higher VIX level indicates an increase in expected market risk and uncertainty, while a lower VIX level indicates lower expected volatility and higher market stability.

Relationship between the VIX Index and the S&P 500 Index

The VIX Index itself has no direct relationship with the S&P 500. However, historical data shows that under normal circumstances, there is a negative correlation between the VIX Index and the S&P 500 Index. When the S&P 500 Index falls, the VIX Index rises, and vice versa. This may be because when the market is turbulent or falling, investors usually increase their concerns about future volatility, causing them to buy hedging tools such as options, thereby pushing up the VIX index. On the contrary, when the market is stable or rising, investors' concerns about future volatility decrease, and the VIX index will fall.

How to look at the VIX index?

The value of the VIX index plays an important role in judging market risks. The VIX index represents the market's expectations of the volatility of S&P 500 index options in the next 30 days, with a median value of 17.5 (1990-2022). The higher the data, the greater the expected future stock index volatility and the more panic; the smaller the data, the smaller the expected future stock index volatility and the more optimistic.

If the panic index operates in the teens or even around ten for a long time, it means that the market is stable and optimistic; when a stock market crash occurs, the VIX index will rise rapidly. Historically, when the VIX index exceeds 40, black swan events usually occur and the stock market plummets. During the subprime mortgage crisis on November 20, 2008, the VIX even reached 80.6.

Last week, the VIX index soared to more than 45 points on August 5, but then fell back to close at 20.37 points on August 9. This shows that the current US stock market has returned to stability. Analyzing historical data, Bank of America found that the price trend of the S&P 500 index after the extreme volatility of the VIX index has a certain regularity, forming different bottom patterns. Specifically:

1. Rapid rebound after a rapid decline, forming a V-shaped rebound: 1997, 2001, 2020
2. Rebound after two bottoming out, forming a W-shaped double bottom: 1998, 2011, 2015
3. Form a head and shoulders bottom composed of the left shoulder, head, right shoulder and neckline: 2002, 2008-2009, 2010
4. Fluctuate between two converging trend lines to form a triangle shape: 2018
   

This month's VIX index experienced a short-term sharp fluctuation, falling from a high of 65.73 on August 5 to 20.37 on August 9. Meanwhile, the S&P 500 rebounded to around 5,300 after a brief decline near 5,100. Bank of America believes that the VIX surge in August 2024 is similar to that in October 1997 and February 2018, both of which occurred when the S&P 500 was close to its 40-week moving average. If the S&P 500 needs more time to stabilize and bottom, a situation similar to 1998 and 2010 may occur, in which the S&P 500 falls below its 40-week moving average and forms a double bottom or head and shoulders bottom pattern. If the VIX index closes above 45 for multiple weeks, it could signal a severe market crisis similar to 2008-2009 or early 2020.

Can I invest directly in the VIX index?

Investors can profit directly through VIX index trading. Investors can choose VIX index funds or corresponding ETFs for trading. When traders predict that the S&P 500 will have greater fluctuations in the short term, they can choose to go long on the VIX index; when they predict that future market fluctuations will slow down, they can go short on the VIX index.

In addition, investors can also observe the VIX index to obtain arbitrage opportunities. Because the VIX index has the characteristics of mean reversion, the trend of the VIX index is easier to predict than the trend of the S&P 500 itself, that is, when it is much higher than the historical average, there is a high probability that it will fall to normal levels in the future. When the VIX index is low, that is, the market is relatively stable, investors can choose arbitrage opportunities such as the foreign exchange market and speculate through high-yield currencies and stocks; when the VIX index is high, that is, the market is more volatile, investors can complete arbitrage through financing currencies.

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