As the record year of 2020 is behind us and we are just coming out of the pandemic and its consequences, we should also look at the VIX levels and compare it to historical performance to see how different 2020 was in that respect as well,
The VIX measures the market volatility as they are reflected in put and call options action, the higher the market investors protect their portfolio against downturn with long put options, the higher the VIX, and vice versa, lower VIX means calmer, up trending markets ahead.
Looking at a chart of the VIX it’s sometimes seen as a mirror image of the S&P500, but a closer look reveals it’s not always the case and the interesting time periods are when the correlations are not -1.
Reviewing the VIX levels historically shows that in the last decade it hovered around the 20 levels for most of the time, when it spiked above 25 it usually meant the market corrected and when it went below the 15 levels, it usually meant complacency ruled the market as it was immune to news, no matter what you threw in its face, it kept going up – 2017 would be a perfect example of this.
A VIX level of 20 would consider a borderline, in case the VIX went below that line it usually meant market traders increased their appetite for riskier assets, so as a general observation we would like to increase risk in case the VIX drops below 20 which in 2020 happened very little, as a fact, it happened the minimum number of times in the last decade as the table below shows, this is, of course, another record for 2020 which shows what a record-breaking year it has been, once the VIX drops below 20 we may start to see another wave up in lower volatility markets until then we may have many uptrend days but the overall volatility in the market will remain high.
Trade smartly.