Created in 1993, this index measures the volatility of the S&P 500 by considering the implied volatilities of a broad basket of S&P500 options. This forward looking indicator is often referred to by the media as the “investor fear gauge.” The VIX is a contrarian indicator meaning when it reaches extreme levels in either direction, a change of market sentiment may lie ahead. History tells us that a value greater than 30 is generally viewed as a time with increased uncertainty in the marketplace; whereas a value less than 20 corresponds to greater investor confidence. A contrarian would view a high volatility measure as a time to buy and the opposite holds true for a low reading. The reason being is that when the investment herd all moves to one side of the trade, unwinding that trade becomes very difficult when everyone is trying to escape “out of the same door” when things turn. In the markets, it is often said to expect the unexpected.
Source: Yahoo Finance
