Despite the prevailing belief that the high fear or fluctuation index, known as “Vix”, warns of a sharp decrease in stock prices, historical data proves the opposite. In an analytical report published by Bloomberg, the writer Nir Qisar explained that the relationship between the high fluctuations index and market performance is not inevitable as many investors imagine.
A scale for fluctuation, not direction
The VIX index, which is usually referred to as the “Fear Index”, measures the expected amount of fluctuation in the performance of the “Standard & Poor’s 500” index within 30 days, and after US President Donald Trump announced comprehensive customs definitions on April 2, the index jumped sharply to 52 points on April 8, which is the third highest level since its establishment in 1990, Overing major crises such as the global financial crisis and the Korona pandemic.
But the irony is that the market did not collapse, but rather began to rise on the same day when the fluctuation index reached its peak. From April 8 to the beginning of this week, the Standard & Poor’s 500 index increased by 13%, which is a big leap in a short period.
The writer says, “The rise of the action index does not necessarily mean that the market will decline. Rather, it indicates only that the price movement will be large, whether up or down.”
He added that the wrong explanation for the high index is probably the result of its misleading name, as its description as “fear index” feeds negative negative perceptions.
Data does not support prevailing impressions
Historical data analysis since 1990 shows that the an index of fluctuation is significantly linked to the level of the actual fluctuation of the market (at a rate of connection of 0.69), but it is almost not related to stock prices within 30 days (at a rate of only 0.1).
It also showed a comparison of the highest daily values of the index that the stock market increased in 68% of cases after the index rose to its highest levels, which is a very close percentage of the periods in which the index was in its lowest cases, which means that the fluctuation does not determine the direction.
An early decrease and late fear
The report indicates that the sharp decline in the market occurred in the early days of April, while the rise of the lying index came after that, that is, the investors felt fear after it was too late, not before it.
“In most cases, the market has reached the bottom when the index appears at scary levels, and this has already happened last month,” the writer says.
Currently, the VIX index is about 24 points, which is much lower than its last peak, but it is still higher than its 19 -points historical average, and this means, according to the report, that the market is still a candidate for more fluctuation, especially in light of the blurring resulting from customs duties imposed by the White House.
The writer concludes with a clear warning, “uncertainty may last longer than we want, and the an indicator may remain high. But that does not mean that the market is on its way to decline necessarily.”
