Analyzing the Relationship Between the Panic Index and Financial Market Trends

Recently, the global market has experienced severe turbulence. A certain country's government announced the imposition of tariffs of at least 10% on goods from most countries, and higher tariffs on about 60 countries with significant trade deficits. This decision has raised widespread concern in the market, mainly due to the following reasons:

• Rising corporate costs, declining profit expectations
• Global supply chains are disrupted, and economic uncertainty is increasing.
• May trigger retaliatory tariffs from other countries, expanding the scope of trade conflicts.

In this environment, investors tend to:

• Reduce high-risk asset allocation (such as stocks, cryptocurrencies)
• Increase allocation of hedging assets (such as gold, US dollars, Japanese yen)
• Expectations for market volatility have increased, and the VIX index has surged.

The chain reaction caused by tariff increases includes rising costs, supply chain disruptions, increased risk of retaliation, cautious investment, and the flow of safe-haven funds, ultimately leading to the spread of panic in the market.

The VIX index soared to 60 on April 7, a level that is extremely rare in history. It has only occurred three times in the past, the most recent being on August 5, 2024, and the first occurrence during the COVID-19 pandemic in 2020.

The current VIX index is at historically extreme levels. In light of this situation, how can we use the VIX to predict market trends?

Introduction to VIX Index

The VIX index is based on the prices of S&P 500 index options and reflects the market's expectations for volatility over the next 30 days. It is considered an important indicator of market uncertainty and panic.

In short, a higher VIX indicates greater expected volatility in the market and stronger panic sentiment; a lower VIX suggests a more stable market with greater confidence. Historical experience shows that the VIX usually spikes during significant declines in the stock market and falls when the stock market is rising steadily. Due to this inverse relationship with the stock market, the VIX is also known as the "fear index" or a barometer of market sentiment.

The normal level of VIX is around 15-20, which is considered a calm range; when VIX exceeds 25, it indicates that the market is starting to show obvious panic; exceeding 35 falls into extreme panic. In extreme crisis events (such as financial crises or pandemics), the VIX index may even break 50. Therefore, by observing the changes in VIX, investors can gain insight into the strength of current market risk aversion sentiment, serving as a reference for adjusting investment strategies.

High Volatility Panic Zone: VIX ≥ 30

When the VIX index rises above 30, it usually indicates that the market is in a state of high fear or panic. This situation is often accompanied by sharp declines in the stock market, but historical data shows that extreme fear is often followed by a market rebound.

Between 2018 and 2024, there have been about a dozen events where the VIX closing price rose above 30 for the first time, including the volatility storm in February 2018, the year-end sell-off in December 2018, the pandemic panic in February-March 2020, the retail investor event at the beginning of 2021, and the interest rate hikes and geopolitical shocks in early 2022.

Statistics show that in the 7 days following these panic events, the S&P 500 index averages an increase of about 1.4%, with approximately a 73% probability of rising after 7 days. This indicates that when the VIX spikes above 30 (panic zone), the stock market tends to experience a technical rebound in most cases in the short term.

Bitcoin tends to rebound strongly after extreme panic. Data estimates the average 7-day increase for BTC to be around 10%, with a win rate of about 75-80%. For example, in February 2022, when the VIX broke above 30 due to geopolitical crisis, Bitcoin surged over 20% in the following week, demonstrating a phenomenon of panic retreat rebound similar to the stock market.

Extreme Panic Peak: VIX ≥ 40

When the standard is raised to VIX ≥ 40 (extreme panic), qualifying events during the period from 2018 to 2024 are extremely rare, in fact, only on February 5, 2018, and the market crash triggered by the pandemic on February 28, 2020, caused the VIX to close above 40 (for the first time in four years), after which the VIX soared to an unprecedented 82 points in March.

Due to the extremely limited sample size, the statistical results are for reference only: after the incident in 2020, the S&P 500 index slightly rebounded by about 0.6% within 7 days (the market experienced severe fluctuations that week but had a slight technical rebound), while BTC rebounded by about 7%. In terms of win rate, both are 100%, but this is solely due to a single event-driven increase (it does not guarantee a rise in similar future situations). Overall, when the VIX reaches historical extremes above 40, it often indicates that the market is under extreme panic selling pressure, nearing its peak, and the chances of a subsequent short-term rebound are relatively high, generally representing a relative low point in the larger cycle.

Although statistically the short-term performance after extreme panic tends to be positive, the small sample size means high uncertainty, and at that time, the correlation between Bitcoin and the US stock market was not as highly aligned as it is now. In practice, a VIX above 40 is more of a confirmation signal that the market is in an extreme panic state, and future market trends still need to be assessed in conjunction with fundamental information.

Low Volatility Range: VIX ≤ 15

When the VIX index falls below 15, it usually indicates that the market is in a relatively calm state. Investor sentiment is more optimistic, and there is low demand for hedging. However, the subsequent trend at this time is not as consistently clear as when the VIX is high:

Between 2018 and 2024, the VIX fell below 15 multiple times, such as after a strong stock market rebound in early 2019, during the stable market period at the end of 2019, during the stock market uptrend in mid-2021, and in mid-2023. During these periods, market volatility was at historically low levels.

In the 7 days following an event point with a very low VIX, the average return of the S&P 500 index is approximately +0.8%, with a win rate of about 60-75%. Overall, stock indices in a low volatility environment tend to maintain a gradual upward trend or slight fluctuations. This indicates that a low VIX does not necessarily lead to an immediate pullback; the market may continue to maintain an upward trend for a period of time. However, it is important to be cautious, as extremely low volatility often implies market complacency, and once a sudden negative event occurs, volatility and declines may be significantly amplified.

The price movement of Bitcoin during periods of low VIX lacks a clear direction. Statistics show that its 7-day average increase is only about +2%, with a winning rate of approximately 60%. Sometimes, the calm periods of low VIX coincide with Bitcoin's own bull market phase; however, there are also times when Bitcoin experiences a corrective trend during low VIX periods.

Therefore, the low VIX has little predictive value for the subsequent movement of BTC, and it must be combined with the funding sentiment and cycle considerations of the crypto market itself.

Conclusion: Risks and Opportunities Coexist

When the VIX soars to the 30-40 range:

• Short-term trading may carry risks, but it also contains potential reversal opportunities.
• BTC usually declines in sync with panic selling pressure, but as the panic sentiment eases, the oversold shorts accumulated can easily trigger a strong technical rebound.
• If the VIX starts to peak and fall, it could be a potential short-term buying opportunity for BTC.
• It is essential to assess the severity of the event itself; if a significant financial risk erupts, the market may continue to decline further.

When VIX ≥ 40:

• Represents that the market is in extreme panic, including possibilities such as liquidity drying up and large capital withdrawals.
• The probability of a short-term drop in BTC is extremely high, but often, if the panic eases slightly after a week or two, the expected rebound in BTC can be quite remarkable.
• In this environment, it is recommended for short-term speculators to maintain high risk control and strictly adhere to stop losses, as "licking blood on the knife's edge" means that profits and risks coexist.
• From a long-term perspective, they are all relatively low points.

When VIX ≤ 15:

• The market is generally in a natural state. Whether BTC rises often depends more on the crypto market's own cycles, capital flow, or technical trends.
• In an overly calm environment, be aware that once unexpected variables or black swan events occur, the VIX may rise sharply, and BTC might also follow with a drop.
• It may be wise to keep a portion of cash/stablecoins as a reserve during this period, while staying alert to risk trends.

The middle range of VIX 15-30:

• Generally regarded as the range of "normal fluctuations." BTC is also affected by the cryptocurrency cycle and macro liquidity conditions, at which point the VIX can serve as an auxiliary indicator.
• If the VIX rises from above 20 to close to 30, it indicates that panic is gradually emerging, and there is a need to moderately guard against risks; conversely, if the VIX slowly declines from 25 to below 20, it shows that panic is fading, and BTC may be relatively stable.

Currently, the VIX is at 50. In the face of uncertainties surrounding tariff policies, market sentiment remains in a state of extreme panic. However, market trends often emerge from despair.

During the pandemic in 2020, the VIX peaked above 80, while the S&P 500 index was around 2300 points. Even after experiencing a panic sell-off recently, the S&P 500 remains near 5000 points, achieving over 100% return over five years. During the same period, Bitcoin was at an excellent buying point, priced at only 4800 dollars, while the peak of this bull market reached 110,000 dollars, with a maximum increase of nearly 25 times.

Every significant drop is often accompanied by market repricing and capital flow; chaos may become a staircase for rising. Whether one can leverage this to climb higher is the key challenge of this period.