VIX and Future Stock Market Returns

Market commentators sometimes cite a high Chicago Board Options Exchange (CBOE) Volatility Index (VIX), the options-implied volatility of the S&P 500 Index as an indicator of investor sentiment and therefore a contrarian signal for the stock market. Specifically, a relatively high (low) VIX indicates panic (complacency) and therefore pending stock market strength (weakness). Does evidence support such conventional wisdom? To check, we relate the level of VIX to S&P 500 Index returns over the next 5, 10, 21, 63 and 126 trading days. Using daily closes for VIX and the S&P 500 Index during January 1990 (limited by the VIX series) through September 2022, we find that: (more…)