There’s an old saying on Wall Street…

“When the VIX is high, it’s time to buy. When the VIX is low, it’s time to go.”

Last Friday, the Volatility Index (VIX) closed at its lowest level since January 2022. In other words, it’s time to go as we head toward the end of April.

The VIX is commonly referred to as Wall Street’s fear gauge. It measures the premium traders will pay for protective options.

So, when the market is selling off and panicking traders are willing to pay whatever it takes to protect their portfolios – the VIX spikes higher. History has proven that’s usually a good time to buy stocks.

On the other hand, when the market is rallying and complacent investors are not concerned about insuring their portfolios – the VIX tends to fall. And a low VIX is often a potential warning sign of trouble to come. 

When the VIX drops to its lowest level for the year, that’s usually a good time to sell stocks.

A Bad Start to the Worst Six Months of the Year

It’s especially concerning that the VIX is so depressed just as we’re entering the worst six months of the year for the stock market.

Stocks tend to perform poorly between May and November.

For proof, we don’t need to look any further back than last year – when the S&P 500 traded at 4300 in early May and was at 3600 by mid-October.

It wasn’t a straight shot lower, of course. Nimble traders could have dodged in and out of the market and avoided much of the carnage.

And I’m sure if we dig deep enough, we might even find some years where stocks actually rallied between May and November.

But most traders will probably sleep easier if they stay out of the market during the worst six months of the year… especially when the VIX is low.

Take a look at this chart of the VIX…

The red arrows point to each time the VIX dipped below 20 over the past 16 months. The blue arrows point to each time the VIX rallied above 30.

Here’s how the S&P 500 behaved during the same period…

The signals weren’t perfect.

For example, the S&P 500 often declined for a few more days immediately following the blue arrows.

But generally, whenever the VIX popped above 30 – it was a good time to buy stocks.

However, the red arrows were quite accurate…

Whenever the VIX dropped below 20, the S&P declined almost immediately after. Of course, the most recent action is an exception.

At the end of March, the VIX first dipped below 20. But the S&P 500 has managed to push slightly higher since then.

Only time will tell if this is a failed signal, or if the decline is merely delayed.

But based on the history of this indicator – and with the calendar heading into May – investors should be extra careful here.

The odds favor a move lower.

Best regards and good trading,

Jeff Clark

How will you protect your portfolio during the worst six months of the year?

Let us know your thoughts – and any questions you have – at feedback@jeffclarktrader.com.