Using extreme levels showed by the VIX index delivered impressive results until November
Buying the S&P 500 when everyone is bearish or selling when everyone is bullish – a good strategy in 2022
US stocks have put a remarkable rally from their 2022 lows. For example, the Dow Jones index bounced several thousand points from its lows, as mentioned previously in this article.
The ups and downs of the US equity market mark the evolution of global stocks. Also, the stock market is an important leading economic indicator. Therefore, every participant in financial markets keeps an eye on the stock market.
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Besides interpreting economic data, traders also use technical analysis to buy and sell stocks. One of the most popular indicators is VIX, also known as the fear index.
VIX measures the stock market’s volatility based on S&P 500 index options. Higher values for the VIX index are typically associated with a declining stock market. Conversely, lower values for the VIX accompany a rising stock market.
So here are three strategies to buy and sell the S&P 500 with or without using the VIX index and how they performed so far in 2022.
Buy the S&P 500 index when VIX closes above 30, sell when VIX closes below 20
This strategy may look as being opposite to what was described so far in the article. Indeed, higher values for VIX indicate a declining stock market.
But they also indicate an overwhelming bearish sentiment. Therefore, if one plans to buy the dip, then higher VIX levels show that the dip is there.
In other words, the market will likely turn bullish next.
Such a strategy of buying the S&P 500 index when VIX closes above 30 and selling when VIX closes below 20 yielded the highest return so far in 2022, close to 28%.
Buy and hold the S&P 500 index
The buy and hold strategy means buying the index at the start of the year and holding on to the investment. It yielded -14.3% as of November 23.
Buy the S&P 500 index when VIX closes below 20 and sell when VIX closes above 30
Finally, the worse strategy of the year was to sell when VIX closes above 30 and buy when VIX closes below 20. It yielded a negative return of -33%.
To sum up, VIX worked as a contrarian indicator in 2022. Buying on extreme bearishness and selling euphoric markets delivered +27.9% so far.
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