Can We Learn Something From Daily VIX Trends (1990-2021)?

Investors - especially less-experienced ones - tend to pay too much attention to return and not enough to 'risk', 'diversification', 'timely and correct trading strategies' etc. And that is especially true when markets are close to their tops. When confronted with too many stories and people who were successful with their investments it is hard to imagine that things could change. However, already since the mid-1980s, those with an academic investment background know that the incredible 'Overreaction'- or 'Mean Reversion' effects are very powerful. In 1985 professors Werner de Bondt and Richard Thaler already showed that a simple strategy of putting all your money in a basket of 'losers' (defined as the least performing stocks over the last 3-5 years) performs better than a basket of 'winners' over the next 3-5 years. And still, we see that most investors tend to extrapolate trends into the future.... partially this is correct because shorter-term momentum variables do indicate that trends can continue for some time. But sooner or later the short-term trend is broker and mean reversion starts. When at the end of a prolonged bull market longer-term variables start to become more important, it is often via the VIX that we get important indications of this 'nervousness'.


Introduction: A Historical Analysis of VIX Trends

In the chart below we present the daily closing values of the VIX Index. VIX is the volatility index of the Chicago Board of Options Exchange (CBOE). It is in a way a kind of ‘nervousness’ indicator for investors. Periods with a VIX below 20 are times during which investors feel ‘kinda okay or even very optimistic’. Periods during which volatility drops and is moving rapidly in the direction of this below-20 zone are normally good periods for equity markets as well.

On the other hand, beware of periods during which VIX is above 40, or is moving in that direction!

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: We do not intend to translate the ...

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Bill Johnson 4 weeks ago Member's comment

Good read, thanks. Hope to see more by you.