Volatility knocks: Here's how you can use the VIX to beat the stock market

The U.S. stock market is struggling, but you may still want to give the bulls the benefit of the doubt.

It seems difficult to put a bullish spin on the low the VIX established in mid-September, given that the last time it was as low was immediately before the stock market’s waterfall decline — in which the S&P 500 SPX shed 34% over 33 days. But no market-timing system is perfect. Even after taking that huge misstep into account, the professors’ approach has beaten a buy-and-hold strategy over the long term.

The core idea is to pick a middle-of-the-road VIX level that corresponds to your target equity allocation. To calculate your equity exposure level in any given month, multiply your target by the ratio of your VIX baseline to the closing VIX level of the immediately preceding month. The table also shows that the conventional wisdom about VIX isn’t wrong: The stock market’s raw performance is indeed better, on average, in the wake of days in which the VIX is particularly high. But what that conventional wisdom glosses over is that those returns are particularly volatile.

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