Famous investor Baron Rothschild is credited with saying, "The time to buy is when there's blood in the streets." But how can investors measure the amount of panic "in the streets?" Enter the Volatility Index, or the VIX.

According to the Chicago Board Options Exchange (Cboe), "The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500 Index call and put options." The VIX was introduced in 1993.

When fear and panic take over Wall Street, it is usually a sign that the stock market is close to bottoming. The VIX is a technical sentiment indicator that helps determine major market bottoms as well as shorter-term swings. According to IBD research, a VIX spike more than 20% above its 10-day moving average line can help confirm a positive reversal in the stock market.

The VIX During The Coronavirus Stock Market Crash

During the coronavirus stock market crash, the VIX first triggered that contrarian signal on Feb. 28 (1). On that day, the Nasdaq found support at its long-term 200-day moving average line. The Nasdaq rallied two of the next three days, but didn't trigger a follow-through day. Keep in mind that the VIX should be used as a secondary indicator to help confirm a stock market trend, not pinpoint the precise bottom. Investors should be relying on a follow-through day as the primary indicator to determine a potential new uptrend.

At its peak during the coronavirus bear market, the VIX topped out at 85.47 on March 18, just points away from the 89.53 peak price that occurred during the financial crisis of 2007-2008. The VIX set an all-time closing high on March 16.

When you see that type of panic, be on the lookout for the classic follow-through day to give the green light to begin buying stocks again. That bullish signal occurred on the Nasdaq on April 6 when the tech-heavy composite surged 7.3% on higher volume than the previous day. Since then, the Nasdaq advanced as much as 27.5% to record highs on June 10.

Current VIX

The most recent short-term bottoming signal occurred on June 12 — just one day after the Dow Jones Industrial Average crashed more than 1,800 points, or 6.9% — when the VIX again rose more than 20% above its 10-day moving average line (2). Through Wednesday trade, the Nasdaq was on a four-day win streak and just off record highs.

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