about 1 year ago • 1 min
Here’s a simple strategy using the volatility index, or VIX. Nicknamed the “fear gauge”, it measures how volatile investors expect the S&P 500 to be over the next 30 days. When it’s higher, it suggests investors are more on edge, and when it's lower, it suggests they’re more complacent with how things are going. If you’d adopted this strategy at the beginning of the year, buying the S&P 500 when nervousness was high (and the VIX closed above 30), and selling and sitting in cash when it’s low (have closed below 20), you’d have seen solid returns at nearly 30% (blue line).
The more-traditional, momentum-based strategy of buying strength and selling weakness (i.e. going long when the VIX closed below 20 and selling when the VIX closed above 30) would have left you in far worse shape (red line). And a buy-and-hold stance (dark blue line) wouldn’t have done much better for you. The key question is whether the strategy can remain effective and deliver similarly solid returns going forward – or was it just a flash in the pan?
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