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How can you use the vix to be aware of market sentiment?

Updated: Apr 7, 2023


Definition of VIX

Have you ever heard of the VIX? If not, buckle in and prepare to learn about one of the most important instruments in the stock market! We will go in-depth on how to use the vix, determine market sentiment with the vix, and trade the vix.


What is the VIX?

The VIX is very easy to learn and use! The VIX is determined based on expiring options off of the S&P 500, it measures 30 days out. In simple terms, the VIX is used to see how volatile the markets are.


But how can we use this to our advantage? Very simple actually! There are ranges on the VIX, that can tell you where the markets are at.




mage of a graph of the VIX with key levels marked

EXAMPLE

Above me, is the monthly chart of the VIX. I marked all the levels on the VIX, circling key levels.


If you look at the chart, we've only hit the 85-90 level twice, both times were during the 2 fastest crashes. Those 2 times were during the market crashes of 2008, and the flash covid crash of 2020.


The faster the crash, the more theVixx will run since it's a volatility index. Once we hit this 85-90 range, the stock markets bottomed.


The next big range is the 50s range, with us hitting it 8 times. Most times were during corrections, including the 2001 bubble, 2002, 2008 bubble, 2010, 2011, 2015, and 2018.


I will show you the historical return of the S&P 500 when the VIX hit $50.

  • 2001: -11.89%

  • 2002: -22.10%

  • 2008: -37.00%

  • 2010: +15.06%

  • 2011: +2.11%

  • 2015: +1.38%

  • 2018: -4.38%



Only 3 out of the 7 had a positive return for the year.


2010

In 2010, the VIX spiked to around 50 due to an event known as the "Flash Crash" that occurred on May 6, 2010.


The Flash Crash was a sudden and dramatic drop in the U.S. stock market, with the Dow Jones Industrial Average plunging nearly 1,000 points (approximately 9%) within minutes before recovering most of the losses by the end of the trading day.


This extreme intraday volatility led to a significant increase in the VIX. That's why we hit 50 under a relatively strong 2010 rebounding market. Now, let's ask the key question.


If I invested $1000 on Thu 20 May 2010(when the S&P 500 hit 50 on the vix), how much would I have made at the end of the year?


The return would be 17.35%. This would be 2.24% higher than the annual return of the S&P 500.


2011

In 2011, we hit 50 on the Vix, but why did we have a positive return?


First off, the Vix hit 50 mainly because of 4 factors, the European sovereign debt crisis, the U.S. debt ceiling crisis, the U.S. credit rating downgrade, and slowing global economic growth.


With all this being said we ended up almost flat, as most stocks still tried to recover from being undervalued, from the previous 2008 and 2009 recession.


Now let's ask, if I invested $1000 on Mon 08 Aug 2011( the day we hit 50 on the Vix), how much would I have at the end of the 2011 year? The return by the end of the year would be 12.37%.


This would've beat the yearly return of 2.11% by 10.26%.


2015

In 2015, the VIX hit 50 in regard to the Chinese financial crisis as well as failing oil prices. That year we did the same thing as we did in 2011. We ranged throughout most of the year, as later in the year is where we saw economic troubles.


We ran to 50 in August, giving back most of the gains from earlier in the year. If you invested $1000 on 2015/08/23( the day the VIX hit 50) you'd have a 3.7% return($1037) end of the year.


This would have beat the yearly return of 1.38%.


KEY ARGUMENT

You can find a market sentiment through the VIX and its levels. Looking at key levels is an amazing tool when looking for market sentiment.


The examples I showed are some ways that the vix can show when the market is undervalued. Most times we ran to this 50 range, it showed signs of a reversal in the market.


We calculated every return when the S&P finished positive during a year the VIX hit 50.


Our calculations show that when invested on the day of the VIX hitting 50, u get an average return of 4.6% higher than investing throughout the whole year.



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