The first half of 2022 has been miserable for stocks but it hasn’t been one-way traffic, with indices enjoying several strong but short-lived rallies.
DataTrek Research says nimble traders looking to play the bounces should keep a close eye on one key market indicator – the Vix. A normal reading for the Vix, Wall Street’s so-called fear index, is around 20. We know volatility is unusually high when the Vix hits 28 (one standard deviation above its mean), says DataTrek, and that there are “exceptional” levels of uncertainty when it gets to 36.
Historically, this has occurred in only 4 per cent of trading days. This year, every tradable low has occurred when the Vix has exceeded 28. It went as high as 36 in March, 35 in May, and 34 in June.
DataTrek suggests traders consider buying when the Vix gets close to extreme levels (36), and reducing exposure when it falls back to 24-25.
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Of course, trading can be a treacherous business. Still, the Vix is also relevant to investors with longer investment horizons, says DataTrek.
Whenever the Vix has hit 36 or higher, the S&P 500 has gone on to average gains of 15.8 per cent over the following six months. A year out, the picture is even brighter – gains have averaged 30.1 per cent, with stocks rising on 96 per cent of occasions.
