Does peaking of volatility index mean bottom of market?
The equity market worldwide has gained more than 20 per cent from its recent low. So technically, they are in a bull phase. For example, Nifty 50 reached its recent low on March 23 and since then; it has gained almost 20 per cent and closed above 9,000 levels at the end of April 9, 2020. Similar movement was seen in other equity markets, including the USA.
This rise has come after the equity market worldwide saw a deep cut in the month of March 2020. Leading equity indices globally saw a cut of more than 35 per cent. Various factors including the outbreak of novel Coronavirus and a sharp drop in crude oil prices were the prime reasons why the equity market was hit. This led to a spike in the volatility of the equity market.
India NSE Volatility Index (VIX), which is a proxy to the volatility of the Indian equity market, is inversely related to Nifty 50. This is the reason when the equity market fell, volatility spiked sharply to the highest level since the global financial crisis of 2008. It jumped from the low of 13.7 on February 20 to 83.6 recorded on March 24. Since then, it has cooled off to 50 currently.
VIX and equity market: Historical perspective
Does this mean that the equity market has already bottomed out and worst in terms of price is behind us? To know this, we studied the past movement of VIX and Nifty.
Last time, we saw such a sharp rise in VIX was in the year 2008. It peaked at 85.13 on November 17, 2008, when Nifty was at 2,799.55. Nevertheless, the market (Nifty) bottomed on March 9 at 2,573, when VIX was at 41.03.
Next time, we saw a spike in VIX was during the year 2011. VIX formed its peak on September 23, 2011, and at that time, it was at 35.16. Nifty 50 closed at 4,867.75 on the same day. It took three more months for the market to reach its bottom. On December 20, 2011, Nifty 50 reached 4,544.2, which was its bottom at that time.
So, history shows that we have not bottomed yet. Nevertheless, we are not far away from the bottom and investors can start investing in a staggered manner, however, we advise you not to invest in a lumpsum.