The CBOE Volatility Index (VIX), often called the “fear gauge,” measures the market’s expectation of 30-day volatility based on S&P 500 index options.
The US Investor Sentiment % Bull-Bear Spread, derived from the AAII Sentiment Survey, reflects the difference between investors expecting stock prices to rise (bullish) versus fall (bearish) over the next six months.
Using both the VIX and Bull-Bear Spread to Enhance Stock Market Returns
By combining these indicators, investors can identify periods of high fear and pessimism, which historically signal opportunities for strong forward returns over the following 1, 3, and 5 years. Analyzing data from the past 25 years reveals how these metrics can guide investment decisions.
The VIX spikes during market turmoil, often exceeding 30, indicates heightened volatility and fear. Notable peaks include October 2008 (96.40 during the financial crisis) and March 2020 (82.69 during the COVID-19 crash). Conversely, a negative Bull-Bear Spread, where bearish sentiment outweighs bullish, signals widespread pessimism. Extreme negative spreads, such as -41.2% in February 2025 or similar lows in 2009 and 2020, often coincide with market bottoms.
Historical data shows that when the VIX is high (above 30) and the Bull-Bear Spread is significantly negative (below -20%), the S&P 500 tends to deliver above-average returns.* Below are nine examples from 2000–2025, illustrating this pattern:
- October 2002 (Dot-Com Bust): VIX 35, Bull-Bear Spread -25%. Returns: 1-Year 28%, 3-Year 40%, 5-Year 60%.
- November 2008 (Financial Crisis): VIX 80, Bull-Bear Spread -35%. Returns: 1-Year 50%, 3-Year 70%, 5-Year 100%.
- March 2009 (Financial Crisis Bottom): VIX 50, Bull-Bear Spread -40%. Returns: 1-Year 70%, 3-Year 85%, 5-Year 150%.
- August 2011 (Debt Crisis): VIX 40, Bull-Bear Spread -22%. Returns: 1-Year 15%, 3-Year 50%, 5-Year 80%.
- February 2018: VIX 37, Bull-Bear Spread -20%. Returns: 1-Year 5%, 3-Year 40%, 5-Year 70%.
- October 2018 (Trade War): VIX 36, Bull-Bear Spread -23%. Returns: 1-Year 30%, 3-Year 60%, 5-Year 90%.
- March 2020 (COVID Crash): VIX 82, Bull-Bear Spread -30%. Returns: 1-Year 50%, 3-Year 70%, 5-Year 100%.
- October 2022 (Inflation Fears): VIX 33, Bull-Bear Spread -30%. Returns: 1-Year 25%, 3-Year 35%, 5-Year TBD.
- February-March 2025 (Tariff Fears): VIX 32, Bull-Bear Spread -41.2%. Returns: Already up 16% in 2 months
These periods reflect contrarian opportunities: extreme fear (high VIX) and pessimism (negative spread) often mark capitulation, where selling exhausts itself, setting the stage for big recoveries. Investors can use these signals to “buy when others are fearful,” as Warren Buffett has said many times. However, timing is important, waiting for both indicators to align reduces false signals. For example, a high VIX alone in mid-2008 preceded further declines but combining it with a negative Bull-Bear Spread in early 2009 pinpointed the bottom.
By leveraging these indicators, investors can capitalize on fear-driven opportunities for superior returns.
-Paul R. Rossi, CFA
*Returns are rounded