FxPro Market Review: The Vix Index at Low Levels, Beneficial for the Stock Market
The Nasdaq 100 and S&P 500 indices experienced slight gains as volatility has decreased to levels last seen in January 2020. Many traders view the reduction in volatility as the calm before the storm, as we observed four years ago. The prudent strategy in this market is to "buy on dips." A sustained rise in the VIX index above 20 would signal the start of a market correction.
FxPro Senior Analyst Alex Kuptsikevich points out: However, history suggests that a decline in the volatility index alone is not sufficient to predict a market reversal. From May 2018 to January 2020, the index repeatedly fell below 12. During that period, the S&P 500 index rose by over 30%. The "buy on dips" strategy might offer more attractive investment returns.
Additionally, the VIX index was below 12 for almost the entire year of 2017, during which the S&P 500 index increased by 20%, with the long-term average being 10-11%. During that trend, the market only saw a strong correction at the beginning of 2018, with the index recovering growth from previous lows.
Previous performance also reflects this: Once the VIX index falls to the 10-12 range, the market tends to accelerate growth, often with minor corrections.
The distinction between a short-term pullback and the initiation of a deeper correction can generally be determined by the 20-level price point of the VIX. A sustained market decline accompanied by increased volatility indicates the market entering a "fear" mode. In such a scenario, the strategy should shift from "buying on dips" to selling during growth.
In October 2023 and April 2024, the VIX index temporarily rose above 20 points but quickly declined, presenting false early signals.
If the VIX index continues to fall, it is only when it drops below 9 that we would receive a signal of "irrational exuberance," though even then, it might take several months for the S&P 500 and Nasdaq 100 indices to reverse.
