The VIX is short for the CBOE Volatility Index. It measures the 30-day implied volatility of a basket of S&P 500 index options.
Why Pay Attention To The VIX?
Investors look at the VIX as a measure of fear and a contrarian indicator. If the VIX is high, the S&P 500 will be low. There is a lot of fear in the market. It’s time to buy. If the VIX is low, the S&P 500 will be high. The market is complacent. It is time to sell.
The VIX is mean reverting and trends toward extremes. It is useful in determining overbought and oversold levels in volatile markets, which has been the case this year.
Charting The VIX
The chart below illustrates the extreme movements in the VIX. It is a daily chart of the VIX. It includes all of this year and last year. You can see the VIX hit its high of 28.14 for the year, when the S&P 500 was at its lows, on February 11th.
The next chart includes the RSI and the Stochastic RSI. The RSI measures the average gain divided by loss over time. The Stochastic RSI uses the Stochastic formula. The RSI is at 37. This is starting to approach 30, which would indicate the index is oversold. The Stochastic RSI is already at 10.5.
Lastly, I included a chart of the SPDR S&P 500 (NYSE:SPY) ETF. The blue line is the 200-day moving average. The red line below the chart is the VIX. The ETF did break through the 200 DMA, which is a bullish indicator, if it can test it and hold. The VIX is trending down. It has not quite gotten to the low end of its range, but it is right there. The highs in the SPDR S&P Trust ETF, from November of last year, are in reach.
Time To Sell?
I think we are approaching overbought conditions for the S&P 500. The index bounced nicely off its lows in early February. However, this year has been all about volatility. The market has not been able to establish a trend. At the end of last week I was somewhat neutral on the S&P 500. There is now some complacency that has set in. This can be seen in the VIX trending downward.
Recommendation
I recommend buying slightly out of the money put options on SPY. The March 24th 199 puts look like a good alternative. They were last trading at 2.79/2.86 on Friday. There should be a good buying opportunity in the coming week. The stock market will most likely be very volatile from now until the Fed meets on March 15th. Look to turn around and sell them going into the meeting, as the VIX moves higher and the market corrects.