While the word volatility doesn’t necessarily mean prices are moving in any one direction, the history of the stock market tells us that when the volatility index is on the rise, the stock market is typically not faring very well. Why is this? The basic answer to this is that the stock market does not like any kind of uncertainty and when there is a significant amount of uncertainty there is often a large amount of volatility as well. Uncertainty tends to lead to volatility and volatility tends to lead to lower prices in the stock market because of the fear of holding stocks as an asset class.

When is high volatility a good sign? High volatility in the stock market as measured by the VIX Index can also be the sign of a market bottom. When the VIX reaches level that were previously never thought to be possible it is one sign that the fear in the markets may be reaching the point where the bottom could be in quite soon. Fear in the market isn’t a good thing, but excess fear can lead to capitulation which washes out the system and helps set stocks up for a positive run.

What is the bottom line with volatility and the stock market? The bottom line is that typically volatility lends itself to lower stock prices because investors would rather be in a safer asset class, but when volatilty levels reach new highs an investor would be wise to expect at least a short term change in the trend of the market. As volatilty rises be prepared to take some money off the table, but as volatility levels skyrocket be prepared to dip your toe back in the water!