When we want to know what is going on in the stock market, most people will take a look at some broad market index such as the S&P 500 Index ($SPX) or the Dow Jones Industrial Average ($INDU). These are two of the most widely used ways to measure the market. Some will also consider looking at the Nasdaq 100 Index ($NDX), or the Russell 2000 Small Cap Index ($RUT), or the Wilshire 5000 Composite Index ($WLSH).
Another index we can look at is the Volatility Index ($VIX) or VIX. This is considered to be a measure of market sentiment by tracking the implied volatility of options for the S&P 500. It is also considered to be a contrarian index, meaning it has an inverse relationship to the stock market. To help remember this inverse relationship, it is helpful to remember a rhyme. “When the VIX is high, it’s time to buy. When the VIX is low, it’s time to go.”
Defining high or low is not based on a specific number on the VIX, but where is the VIX relative to where it’s been. In particular, we want to focus on the peaks and valleys and recognize support or resistance levels on the VIX. If we see the VIX hitting a resistance and heading down, that would be a high, or a good time to buy. Since this is a contrarian index, this would most likely occur after the market has experienced a drop.
Currently, the VIX is near support. If it holds support and starts climbing, it would be considered a bearish sign or “a time to go.” Remember this is a contrarian index, which has occurred after a bullish run from the market. The market has leveled, establishing a resistance, as the VIX has been establishing support. This would indicate a time to be cautious or to consider more bearish opportunities.
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