VIX Falls to Lowest Level in Nearly 4 Years — Is it Time to Buy the VIX?

VIX Falls to Lowest Level in Nearly 4 Years — Is it Time to Buy the VIX?

by

The VIX — a measure of volatility in the S&P 500 over the next 30 days (also known as the market’s “fear gauge”) is now trading at its lowest level in nearly 4 years, leading some traders to ask the question, “Is it time to buy the VIX?”

This level predates the Covid-19 pandemic, and is far lower than the average VIX for the year. For that matter – the VIX currently trades below the “average VIX” for 31 of the past 33 years. 

What is the Average VIX?

In the chart below (accurate as of November 1st), note that the YTD average in the VIX is 17.5 — that’s right in the middle of what the average yearly VIX is. Currently, the VIX is trading below all yearly averages except for 1995 and 2017.

YEARLY AVERAGE VIX1990-2023
YearAverage VIX
200832.7
200931.5
202029.2
200227.3
200125.8
202225.6
199825.6
199924.4
201124.2
200023.3
199023.1
201022.5
199722.4
200322.0
202119.7
199118.4
201217.8
202317.5
200717.5
201516.7
201816.6
199616.5
201615.8
200415.5
199215.4
201915.4
201314.2
201414.2
199413.9
200512.8
200612.8
199312.7
199512.4
201711.1

Recently, the VIX was trading significantly higher than it is now. On October 23rd, just a month ago, the VIX reached a high of 23.08 before experiencing a big fall, losing -46.06% over the following 30 days.

Note that the weekly decline from the first initial VIX drop (a loss of 30%) was the 9th largest weekly decline in the history of the VIX. 

Largest Weekly VIX Declines in History

RankWeek EndingVIX Percentage LossVIX Close
1.7/1/2016-43%14.8
2. 1/4/2013-39%13.8
3. 12/10/2021-39%18.7
4.11/11/2016-37%14.2
5.2/5/2021-37%20.9
6.11/6/2020-35%24.9
7. 2/16/2018-33%19.5
8. 8/24/2007-31%20.7
9.11/3/2023-30%14.9
10.7/17/2015-29%12.0

So the question becomes, is it time to buy the cheap VIX?

Is It Time to Buy the VIX?

The answer to that question depends on why you’re buying the VIX. If you’re buying the VIX as insurance against a bullish portfolio, then by all means, pick up a proportionately appropriate amount of the VIX or calls within it as a cheap hedge against a market shakeup. However, if you’re considering buying the VIX as an outright bearish bet, you probably want to hold off for the next month. Here’s why: 

The VIX Vs. The SPY

Because the VIX is a representation of the market’s level of “fear,” the VIX often moves opposite the SPY. Here’s an overlay of the two charts relative to percentage gain and loss:

In other words, if the SPY continues to rally, it’s unlikely that a pure bearish VIX bet would pay off. And based on the technicals, seasonal trends, and most other indicators available to traders, that’s likely what the market is going to do in December of 2023.

Here are a few pieces of analysis to consider:

Technically speaking, the market just pulled out of a healthy 10.93% correction, which it experienced from July 27th to October 27th. Corrections are not inherently bad. In fact, corrections are a symptom of a healthy market. Here’s the recent correction in the SPY:

Immediately following the correction, the SPY experienced a powerful V-shaped recovery in short order. Within 20 trading days, the SPY put up a stellar +11.23% rally — less than one third of the total trading days it took for the correction to reach its trough.

As another piece of bullish data, according to BofA, equity fund inflows just experienced their largest two week inflow since February 2022. Massive inflows aren’t often a simple short-term trade — they’re a symptom of institutional buying. In other words, inflows of this size usually aren’t trades, they’re investments. Those investments make a lot of sense given that it looks clear that the market is out of correction territory.

On top of the fast recovery from the correction and institutional inflows, we can look at technical analysis as a sign that we likely have more upside to go before we can think about making outright bearish bets with the VIX. 

One pattern that’s nearly two years in the making is finally starting to break out — it’s in the Nasdaq 100, and its parallel ETF, the QQQ. The pattern below is known as a cup & handle, and it’s commonly considered a bullish sign when the “handle” breaks out to the upside. 

The daily and weekly timeframes show a sustained breakout, while the monthly time frame looks extremely promising for a longer-term bullish move that could exceed the all-time highs in short order. The Nasdaq Index is largely comprised of the same “Magnificent 7” mega-cap stocks that have a high weighting in the S&P 500 — so this segment of the market matters a lot.

There’s plenty of other technical analysis that we could hone in on, but instead, let’s look at yet another piece of data: 

Stock Market Seasonality 

The bull case for the stock market is strengthened as we enter December by stock market seasonality. In the chart below, note that the average monthly return for the S&P 500 in December is +1.3%, placing it as the third highest performing month of the year behind November and April. 

We can go on even further — let’s look at the dollar. The dollar (which, like the VIX, often moves opposite the stock market) is declining rapidly, and is currently in the midst of its largest monthly drawdown since November 2022 (chart below sourced from Barchart). If we were to overlay a chart of the dollar atop the broad market, it would probably look something like the SPY vs VIX chart above. That means dollar up — stocks likely down. Dollar down — stocks likely up.

All of these data points come together to form a bullish confluence, which tells us that the market likely has more upside to go as it seeks to close out the third most bullish month of the year — on the back of big momentum. So let’s wrap up our question:

Is it Time to Buy the VIX?

As long as you’re sizing your positions appropriately, it’s never a bad thing to have a hedge against a much larger portfolio. That’s why options are incredible — you could buy simple VIX calls expiring a few months out for pennies on the dollar (depending on your strike and expiration). If stocks fall, you can take a deep sigh of relief knowing that you have an insurance policy on your treasured investments. If they don’t, your VIX calls might expire worthless, but it won’t matter — your stocks will likely have appreciated enough to cover the difference. 

However, if you’re looking to simply buy the VIX “because it’s low” as an outright bearish bet, I would strongly consider all of the data we’ve covered here. After all, during the entire two-month period between June and July of this year, the VIX was also “low.” It stayed that way, moving very little up or down as the market continued to rally. If you were holding the VIX in June, which was the YTD low at the time, you only had a short period to claim victory before the VIX fell once again to remain below your initial entry point.

To say it a different way, a lot of traders and investors get caught up in the “it must reverse” mindset. Stocks are higher than usual? “They have to reverse lower — they’re never that high!” Or,when stocks are lower than usual, “They have to reverse higher — they’ve never been that high!” The truth is that there’s nothing to prevent stocks from continuing their trend. As momentum traders, finding trends like these is often our bread and butter. 

One final word of warning: Like we said, nobody knows where stocks will truly take their next leg higher or lower. It’s what makes the VIX such a compelling hedge. However, through the first half of the year, this same technical, seasonal, and data-based analysis led me to lean bullish when selecting UOA whilst most of the major market analysts were leaning bearish. And from the August 8th weekly bearish engulfing candle all the way through September, the same analysis led us to correctly predict the market downside. Is the third time the charm here?

Subscribe to Rebel Roundup for your weekly digest of market highlights and free trading lessons.
We’re on a mission to empower retail traders with the tools they need to succeed.

Join a growing community of traders with Market Rebellion

Join the thousands of users daily!