Recently, a friend asked me how I view the volatility in the U.S. stock market, and it reminded me that I should talk properly about the VIX Fear Index. To be honest, this is an indicator that many people overlook, yet it’s extremely important.

Let’s start with what VIX is. Its full name is the Volatility Index. It was created by the Chicago Board Options Exchange in 1993 to measure investors’ expectations for the S&P 500 index’s volatility over the next 30 trading days. Simply put, the higher the VIX reading, the stronger the market’s fear sentiment; the lower the reading, the calmer the market is. That’s also why everyone calls it the “Fear Index.”

Just look at history to understand. Every time a global crisis occurs, VIX spikes. The 1997 Asian financial crisis, the 2001 9/11 terrorist attacks, the 2008 financial crisis, the pandemic in 2020… VIX rises sharply in all these cases. Among them, the 2008 financial crisis was the most extreme—VIX even approached 80. These numbers clearly reflect the market falling into an extremely panicked state.

VIX has an interesting characteristic: it often reaches its peak at market lows, and hits rock bottom at market highs. This also explains why Warren Buffett said, “Be greedy when others are fearful.” When VIX is abnormally high, it usually means a buying opportunity may be there; and the same applies in reverse.

When it comes to the Taiwan market, we also have our own Taiwan VIX. The most memorable period in recent years was during the 2020 pandemic, when Taiwan VIX once surged to 57, and at that time the Taiwan stock market fell by 344 points. Since last year, things have improved a lot. Taiwan VIX has fluctuated mostly between 10 and 20 for most of the time, reflecting a relatively stable market.

For those who want to participate in VIX investing, there are now quite a few tools to choose from. In 2004, the CBOE launched VIX futures, and in 2006, it introduced VIX options, allowing retail investors to get involved too. There are also various ETFs and ETNs that track VIX, such as VXX, VIXY, UVXY, and others. They can be bought and sold just as easily as stocks. However, it’s important to note that because these products involve futures rolling, long-term holding may face the problem of value decay.

From an investment perspective, the most practical applications of the Fear Index VIX are three areas. First, it helps you capture the market’s reaction to major events. When economic data is released, political events occur, or geopolitical risks emerge—these will all show up in VIX. Second, the VIX level can guide your strategy choices: when VIX is low, you may consider buying; when VIX is high, you should be cautious. Finally, it can also serve as a reference indicator for hedging tools.

But one point must be emphasized: a high VIX value doesn’t necessarily mean a bear market. VIX reflects volatility expectations, not the direction of the market. I’ve seen situations where the broader market declined but VIX didn’t rise noticeably, which shows that relying solely on the Fear Index isn’t enough.

The data from the past year is quite interesting. For most of the time, VIX has fluctuated in the 12 to 20 range, indicating that market sentiment has been relatively stable. Although the U.S. stock market faces a lot of uncertainty—Federal Reserve policy, geopolitical issues, corporate earnings expectations, and so on—VIX doesn’t seem to fully reflect these worries. This also reminds us that the Fear Index is only one side of a mirror reflecting market sentiment, and it can’t be used as an absolute predictive tool.

In general, for stock investors, understanding the VIX Fear Index is essential. But don’t treat it like a crystal ball—it’s only a tool to help you understand market psychology. Real investment decisions still require considering a variety of factors, conducting comprehensive market analysis, and managing risk. Only then can you stay rational amid market volatility.