Spiking VIX can signal it's time to buy stocks

MW Spiking VIX can signal it's time to buy stocks

By Jamie Chisholm

The Cboe Volatility Index, the option-derived measure of expected S&P 500 volatility known as Wall Street's fear gauge, has eased back slightly from the highs seen during the latest market selloff.

However, at more than 27 - compared with its average of 19.5 - the VIX VIX remains elevated.

After studying what tends to happen to stocks after the VIX spikes to such levels, Nicholas Colas, co-founder of DataTrek, said it could be used as a signal to buy the market.

In a recent note, Colas observed that one standard deviation from its average level is 27.3 for the VIX, and he provided the chart below that showed the previous three times the mark has been neared or breached over the past couple of years.

The VIX hit nearly 27 in March 2023 during the U.S. regional banking crisis. It surged by more than two standard deviations in August last year during the U.S. growth/Japanese yen carry trade scare; and rose above 27 in mid-December after what some investors considered a hawkish Fed meeting and press conference.

Each time the market subsequently rallied.

"We'll know when stocks may have made a tradable low if/when the VIX is either very close to 27.3 or above it. The historical track record of this indicator is clear," said Colas.

"While it will feel uncomfortable to add equity exposure in that sort of tape, the VIX Playbook says such entry points can be profitable for a trade or as a place to add to long-term holdings," he added.

Furthermore, the market currently is providing a signal that investors don't think the current intensity of volatility will be maintained for long. That's shown by the VIX futures market in backwardation, meaning the futures contracts for coming months are priced lower than the cash VIX. The March VIX future (VXH25) is 21.85, April (VXJ25) is 20.89, and May (VXK25) is 20.52.

Of course, it is possible that futures traders are too sanguine and the VIX may stay elevated for an extended period. If that's the case, it's bad news for the stock market, Colas said.

"If stocks do not bounce in the week after the VIX hits 27.3, we know we have bigger problems. Usually, when stock market volatility stays elevated policymakers do their best to calm the waters. If it remains high this time around, we expect the same response," Colas said.

Colas wrote those words before it became clear that the U.S. government doesn't seem interested in assisting the market as the economy is restructured. That may leave all the heavy lifting for the Federal Reserve.

But in fresh comments relating to Monday's selloff, Colas is optimistic. "The VIX clearly says U.S. stocks are oversold enough that they should bounce here," Colas said. "The bull market that started in October 2022, may be on pause, but it's way too early to say that it has morphed into a full blown bear."

-Jamie Chisholm

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March 11, 2025 08:12 ET (12:12 GMT)

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