History suggests you should buy the dip if stocks falter at this level

It’s been quiet on Wall Street, suspiciously quiet. Investor fear — as measured by the CBOE Volatility Index VIX, +2.15% — is slowly drifting lower. In fact, the VIX just dropped below 15 for the first time since October. Real time volatility has dropped even more than implied by the VIX. A simple but accurate way to gauge real or actual volatility is to measure the difference between the S&P 500’s SPX, -0.08% daily high and low over a period of time.

Three months after the initial signal, the VIX was higher every time, 29% on average. Following the VIX’s first drop below 15, the S&P 500 fell each time thereafter, or at the minimum offered a better entry level to buy at. In summary, periods of low volatility usually end up being the calm before a storm, but most storms don’t turn into a hurricane. Although the above research is based on the S&P 500, back-testing shows similar results for the Dow Jones Industrial Average DJIA, -0.

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