The Volatility Index — or VIX — measures how quickly the price of S&P 500 Index components is changing.
What it means:
The VIX was created in the 1990s as a way to measure the level of anxiety investors are feeling about the market at any given time. By measuring the magnitude of price movements, the VIX acts like a thermostat: When the swings are dramatic and volatility is high, the index rises. How quickly prices change can be a useful way to gauge sentiment among market participants — the VIX is also commonly known as the fear index. The VIX tracks stock index futures using a calculation designed to show anticipated volatility in the U.S. market. While the formula to compute the index is mathematically complex, the VIX itself is easy to understand. Traders typically use this as a rule of thumb: A number between 13 and 19 can suggest market players are expecting stability, while 20 and above may suggest possible uncertainty and increased market fear. The VIX is one of many sentiment indicators. Another example is the TD Direct Investing Index which measures independent investors’ buying and selling behaviour for the past month. Ultimately, the goal of sentiment indicators is to measure the feelings of investors by turning behaviour into data that can be collected and charted. By looking at big moves in the market, active traders can consider VIX levels and other sentiment indicators when determining a trading strategy.