It’s no secret that markets have had a rough start to 2022. Between inflation worries, COVID and the uncertainty surrounding the Russian invasion of Ukraine, traders have been cautious.
Earlier this year, the Invesco QQQ Trust Series 1 (NASDAQ:QQQ), which tracks the 100 largest non-financial stocks in the NASDAQ, officially entered a bear market. Thankfully, there are ways we can track sentiment and find clues about when markets may reverse.
It's no secret that as traders we love having information and being able to objectively measure market behavior. So in 1993, Robert Whaley, a professor at Vanderbilt, created an index to track fear and uncertainty: the VIX.
The VIX (CBOE: VIX) is a measure of volatility: it tracks the movements of options contracts of the S&P 500 Index (NYSE:SPY). In times of uncertainty, the VIX rises.
So Why Is The VIX Important?
Ryan Detrick, chief marketing strategist at LPL Financial Holdings Inc (NASDAQ:LPLA), tweeted an interesting fact about how the market performs following times of high uncertainty.
The VIX closed beneath 30 after 11 consecutive days above this level.
This could be a good sign, as when previous streaks ended it brought some solid returns.
A few weeks ago, the VIX crossed above 30, indicating high uncertainty in the markets. The VIX stayed above 30 for more than 10 days. As Detrick points out, history shows us that following a period of high volatility, the market is higher 11 out of 12 times a year later.
“We know fear is high and volatility is off the charts, but we've seen scary times before,” Detrick told Benzinga.
“The lower VIX could be the first clue things are firming up and you can't argue with the future returns."
On Tuesday, the VIX closed right around 30 and it moved lower today. This shows that investors are more convicted in the markets, a bullish sign.
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