In a sharp, late-day selloff on remarks by Federal Reserve Chairman Jerome Powell, Wall Street’s fear gauge — the CBOE Volatility Index — spiked to 27.62, the highest level since early August . It’s undoubtedly true that equity investors should “not fight the Fed,” and the Fed is not sending bullish signals, at least not if one believes the best reason to buy stocks is an accommodative monetary policy, but what signals are equities sending? And is a VIX spike an alarm bell to head for the exits? Or a dinner bell suggesting one should start loading up on underpriced stocks? .VIX YTD mountain CBOE Volatility Index, YTD The relationship between forward returns in the S & P 500 and the VIX Index (CBOE Volatility Index) level is complex but provides insights into market sentiment and potential future performance. The VIX reflects market expectations of near-term volatility. A high VIX (e.g., above 25) suggests heightened uncertainty or fear among investors, often coinciding with market sell-offs. Historically, high VIX levels occur during market drawdowns, making them potential contrarian indicators. The idea is that extreme fear may signal capitulation and oversold conditions, which could precede a market rebound. When the VIX spikes above 25, the S & P 500 often experiences negative short-term returns. However, these periods can also mark the bottoming process in markets. Studies have shown that elevated VIX levels frequently coincide with above-average forward returns in the S & P 500 over a 6- to 12-month horizon. This reflects that heightened fear leads to the undervaluation of equities, presenting buying opportunities. For instance, when the VIX exceeds 25, the average forward 12-month return for the S & P 500 has historically been higher than during periods of low VIX. My work looking at data since January 1990, the earliest VIX data we have, is that the mean 30-day return for the S & P 500 is about 83 basis points (.83%). That number more than doubles to 1.89% when looking at periods when the VIX Index was above 25. Is this a screaming buying opportunity? Well, that depends on one’s risk tolerance. The mean drawdown over 30 days since 1990, when there was one, was -3.65%. What was the mean drawdown when the VIX was greater than 25? It was -5.65%. Trading strategy In other words, yes, 30-day returns are much higher on average when the VIX is elevated, but so is the downside risk. Warren Buffett’s advice to be “greedy when others are fearful” aligns well with this contrarian approach. Buying during periods of high VIX can make sense under certain conditions: Market Valuations : High VIX levels should be accompanied by reasonable or attractive equity valuations to justify taking on the additional risk. The market isn’t particularly compelling; despite the 3% drawdown, valuations—looking at traditional measures such as trailing and forward P/E ratios—remain elevated. Equities were historically very cheap after the “pandemic plunge” or the crash in 2008/2009. This is not true now. Risk Tolerance : Investors need emotional resilience and a time horizon to withstand further potential volatility or drawdowns before the recovery. This is a personal thing. Suppose you believe the bullish remarks from many in the business community regarding the incoming administration. In that case, you might be willing to endure significant choppiness as we see how the pre-election rhetoric translates to policy. Historical Context : The effectiveness of this strategy depends on broader macroeconomic factors. For instance, markets continued to fall during systemic crises like 2008 despite high VIX readings. Understanding the context of the spike is critical. Instead of timing the exact bottom, investors might consider gradually increasing their equity exposure during periods of high volatility—more so than they might ordinarily. High VIX environments can persist, so maintaining diversification and liquidity is essential to weathering short-term risks. Equity valuations have never been a good timing tool, and a slightly “higher for longer” monetary policy doesn’t completely erase the other positive data that was encouraging unbridled optimism only two days ago. Don’t put any names you considered purchasing back on the shelf. Instead, take advantage of elevated options premiums to sell cash-covered downside puts to either collect some yield or scale in at favorable levels. We never get precisely the market we want, so opportunistically, trade the one we are given. 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