Yesterday, we witnessed a historical spike in the VIX, often referred to as the “Fear Gauge.” This index, which measures market expectations of near-term volatility in the S&P 500, recorded its second-largest one-day percentage increase in history.
The only day with a larger spike since the index’s inception was February 5, 2018, when the S&P 500 fell by 4.1%. While such movements in the VIX can be alarming, it’s crucial to understand its potential role as a contrarian indicator, especially during extreme market conditions. Historically, after large VIX spikes, the S&P 500 has generally experienced positive returns, often exceeding average returns over the same period. Simply put, heightened volatility can sometimes mark a capitulation point, potentially signaling a near-term market bottom.
