Warren Buffett once famously said: Be greedy when others are fearful.

It sounds simple, but the problem is, how to determine when to be 'greedy'?

Today, I will Share an index with everyone; it acts like a 'stock market thermometer' that can often measure changes in market sentiment, helping us better grasp market trends.

This magical index is called the VIX Index (Volatility Index).

What is the VIX?

The VIX Index (Volatility Index), also known as the 'Fear Index', is an indicator introduced by the Cboe Global Markets in 1993 to measure expected volatility in the U.S. stock market.

This index is based on the S&P 500 Index and is calculated using the weighted prices of S&P 500 options.

In simple terms, through the VIX Index, investors can know the level of panic in the U.S. stock market. The higher the VIX, the greater the level of market fear and uncertainty.

What does the level of the VIX Index represent?

So, what does the specific value of the VIX mean?

Although the VIX Index is generally not expressed as a percentage, it can help us understand its meaning.

The VIX reflects the market's expectation of the level of volatility for the S&P 500 Index over the next 30 days.

For example, if the VIX Index is 28, this indicates an expected annual volatility of 28%, with a probability of 68%. When converted to monthly volatility, it is 8.09%. In other words, after thirty days, there is a 68% chance that the S&P 500 will fluctuate within 8.09%.

In general, the larger the value of the VIX Index, the greater the expectation of future market volatility. The smaller the VIX Index, the more stable the expectation of market volatility.

Historically, whenever market crises occur, the VIX Index tends to surge.

For example, during the financial crisis in 2008, the VIX Index soared to levels above 50, indicating a state of extreme panic in the market.

The chart below shows the historical trend of the VIX Index.

The relationship between the VIX and the stock market.

What is the relationship between the VIX Index and the S&P 500 Index?

Generally, the VIX Index tends to move in the opposite direction to the S&P 500 Index.

Historically, if the VIX rises, the S&P 500 usually falls; if the VIX falls, the S&P 500 rises or remains stable.

However, the trend of the VIX does not always have an inverse relationship with the stock market. In fact, according to marcoption, about 20% of the time, the VIX Index and the S&P 500 Index will move in the same direction.

So, what range of values for the VIX Index is favorable for the stock market?

Based on experience, investors can focus on the following two key values.

• When the VIX Index is below 20, it indicates that the future trend of the US stock market may be relatively stable.

• When the VIX Index is above 30, it suggests that the future trend of the US stock market may experience significant volatility, as increased uncertainty raises investor fear.

According to a report by Capital Group, historically, when the VIX Index remains low, the S&P 500 Index tends to see higher returns.

How to cleverly use the "Fear Index"?

For ordinary investors, how can VIX be used to judge future market trends?

Attention may need to be given to two signals: the key level where VIX breaks below 20, and the occurrence of a death cross in VIX.

Research conducted by senior Algo Analyst Rocky White shows that when the VIX breaks below 20, if the market is in good momentum, it may indicate that the S&P 500 Index has more room to rise.

The report indicates that when the signal of VIX dropping below 20 occurs, and the S&P 500 has risen at least 7% in the previous three months, the S&P 500 Index has risen four times in the following three months with an average increase of 4.87%. In the next six months, the index averaged a rise of 6.88%, with each return being positive.

Another signal is the VIX experiencing a death cross. It usually indicates that the stock market will rise in the next two weeks.

A death cross is a technical term in the stock market that occurs when the VIX's 50-day moving average falls below its 200-day moving average.

According to the statistics from Stock Trader's Almanac, the VIX Index has seen 35 death crosses since 1990. The S&P 500 Index has averaged a 2.5% increase within 60 trading days following this signal.

Summary

The VIX is an index of concern for most investors, primarily used in three aspects: observing market risk and investor sentiment, predicting market trends and volatility, and adjusting trading strategies.

Note three points:

• The VIX measures the level of fear in the U.S. stock market. The higher the VIX, the more fearful the market is.

• Generally, the VIX Index tends to move in the opposite direction of the S&P 500 Index.

• Two signals may help determine market direction using the VIX: when the VIX breaks below the key level of 20, and the occurrence of a death cross in the VIX.