Market Panic Eased — Time to Act?

A VIX Spike Can Be Bullish — But Volatility Comes With a Price

A surge in the VIX often signals heightened fear — and for contrarians, that can mean opportunity. But while a spiking, it can sometimes precede gains, it also brings sharp market swings that can shake even experienced investors out of their positions.

Right now, the VIX is elevated, and if it remains at current levels through the end of March, a cautious portfolio adjustment would suggest reducing equity exposure for April to around 47.6%.

The VIX — often called Wall Street’s “fear gauge” — has more than doubled in just 16 trading sessions from mid-February through last week. At current readings, it’s sitting above 92% of all daily levels since 1990. Contrarians see this as a bullish signal, particularly when the spike is sudden and sharp.

But here’s the reality: Stocks historically perform better when volatility is low. While high VIX levels may precede market rebounds, those rebounds are often extremely volatile. In contrast, periods of low volatility tend to produce steadier, more reliable returns.

A Smarter Way to Manage Risk

Research from finance professors Alan Moreira (University of Rochester) and Tyler Muir (UCLA) supports a volatility-based strategy. Their work, “Volatility-Managed Portfolios,” shows that adjusting equity exposure based on volatility levels can improve risk-adjusted returns over time.

Their approach is simple:

Start with a target equity allocation based on average volatility levels.
Each month, adjust that allocation by multiplying it by the ratio of a baseline VIX level to the previous month’s closing VIX.

For example, let’s say your target equity exposure is 60%, and you use the VIX’s historical median of 17.61 as your baseline. With a VIX reading of 19.63 at the end of February, you’d scale back equity exposure to 53.8%. If the VIX remains elevated, the model suggests dialing back to 47.6% for April.

Since 1990, this strategy has consistently outperformed buy-and-hold on a risk-adjusted basis, with a Sharpe ratio of 0.99 compared to the market’s 0.78 — and it’s continued to outperform in real-time since the study’s publication.

The Contrarian Mistake

Contrarians aren’t wrong that markets can rise after periods of high volatility. But they often overlook the risk: the return-to-volatility ratio is less favorable when the VIX is high. Historical data shows that although average monthly returns after the highest VIX readings are nearly double those after the lowest VIX readings, the accompanying volatility is nearly three times greater.

What This Means Now

With the VIX currently in its highest quartile historically, the next market move could very well be upward — but expect a turbulent ride. For most investors, adjusting exposure based on volatility, rather than betting on fear turning into sudden gains, may offer a smoother path to solid returns.