Should Investors Fear the Fear Index?
The VIX Index can provide clues about future stock returns
If you’re a contrarian, then what seems like good news to others may feel like bad news to you, and vice versa. And sometimes, for investors, it can pay to be a contrarian. Some astute investors rely on sentiment measures as contrarian indicators of expected stock returns. For example, if most investors are bullish, that might be a sign that a bear market is just around the corner. And when investors are bearish, that might actually be a bullish sign. By this logic, if investors aren’t fearful, does that mean you should be fearful? And when investors are afraid, might that actually be an investment opportunity? To answer those questions, we can take a look at an index called the VIX, which is also known as the Fear Index.
The VIX
The VIX was created in 1993 by the Chicago Board of Options Exchange, now known simply as CBOE (pronounced “see-bo”). It’s an index, but it’s also a tradeable investment product with VIX as its ticker symbol. At a very high level, the VIX is a measure of stock market volatility. When the VIX is high, investors are expecting a lot of market volatility or price swings — in other words, investors are fearful. When it’s low, there isn’t much expected market volatility and so investors aren’t fearful of major stock price swings.
