Volatility 25 is a neutral indicator. Here's why:
- Definition: The S&P 500 Futures 25% Defined Volatility Index is designed to measure the performance of the S&P 500 Futures (3-Day Roll) Index1. It is not directly related to the VIX, which measures the implied volatility of S&P 500 index options with 30 days to expiration23.
- Interpretation: A VIX level of 25 does not necessarily mean that volatility will average 25 percent over the next month4. It is a market index that represents the market's expectations for volatility over the coming 30 days, and it is often used as a gauge for market sentiment and risk23.
- Market Sentiment: Volatility indexes like the VIX typically spike during times of market stress or uncertainty, such as during the COVID-19 pandemic4. However, for most of its existence, the VIX has generally sat between the levels of 10 and 304.
- Historical Performance: Studies have shown that the VIX tends to overestimate volatility by an average of 4 or 5 percent4. This means that a reading of 25 might not accurately reflect the actual volatility expected in the market.
- Trading Strategies: Traders can use the VIX to gauge market sentiment and to hedge or speculate on volatility changes35. However, relying solely on the VIX for trading decisions can be challenging, as it is just one metric among many that can influence market movements.
In conclusion, while a VIX level of 25 might suggest a moderate level of expected volatility, it is not a definitive buy or sell signal. Investors should consider it as part of a broader analysis that includes other market indicators and their own risk tolerance and investment strategy.