What Happens When India VIX Crosses 25?

Market Update - Wednesday, 15 Apr

The morning started with a nice gap up following yesterday's trading holiday. Despite a lack of absolute clarity on the war front, global markets appear to be setting the event aside as if it is almost done. A great highlight of today's session was the continuity of that initial gap. Usually, markets might gap up on good news and then give up some gains, but today remained consistently good all through the day.

The market itself does not seem overly worried about these macro factors as of now. The market closed 1.63% up today, confirming that a bottom was indeed made at the 22,000 mark. The last three sessions have been very significant. While similar patterns have happened in the past, these are the first signs of the market thawing. Staying the course after the gap up, despite previous bad news days, shows resilience.

• Nifty Junior rose 2.15%, almost entirely recovering its losses from March. All major trends are up, with Mid caps rising 2.2% and Small caps increasing 2.3%.

• Nifty Bank also gained 1.25%, though its mid and long-term outlook remains slightly negative.

• In other assets, Gold was flat at 0.67% down, while Crude Oil is stabilizing near $95 or $96.

Other Market Triggers

• The advance-decline ratio was a flatline at 457 to 42.

• The beauty of today's market is that despite a six or seven-day run and a huge gap up, the advances remained stagnant and did not dip throughout the day. This indicates that strength is returning gradually.

• However, many investors are experiencing a deer in the headlights syndrome. After waiting to deploy money, they are now facing a sudden 10% jump in the market with individual stocks jumping 10% to 15%.

• This makes it difficult for them to enter now. This is why rule-based and strategy-based entries and exits perform well, as they remove the burden of making difficult emotional decisions during rapid moves up or down.

• The Nifty heat map was extremely green with a very nice spread of gains.

• Bharti Airtel and Dr. Reddy were the only red marks on the map, while Reliance performed very well.

• Nifty Next 50 also did extremely well with stocks like DLF, Chola Finance, HDFC AMC, and CG Power showing strength.

• BPCL rose 6% and LTIM also did well. In the mover of the day segment, Railtel jumped 18.4% following multiple fresh orders, making it the star of the day.

• Conversely, Just Dial fell 4.8% due to Q4 results that were not so good.

U.S. Market Updates

• The positive sentiment extended to the US markets in the previous session, with gains ranging from half a percent to one and a half percent.

• Companies like Oracle, Meta, Amazon, Nvidia, and Alphabet saw gains between 3.6% and 4.7%. While these are not specific recommendations, some of these stocks can be part of the Weekend Investing US stock strategy.

• The NASDAQ 100 heat map is looking very green, suggesting that global equity markets are sighing a sigh of relief as the worst appears to be behind us.

What to watch next ?

• One tricky situation currently arising involves the slipping of the rupee. India has now slipped to the sixth ranking globally, behind the United Kingdom and Japan.

• While the country was recently close to challenging Japan, it is now number six in dollar terms.

• Although this rank may be regained over time, it is clear that the government needs to step up and provide a trigger to the system. There is an ongoing narrative regarding a slip in competitiveness, suggesting that current taxation policies or the general attractiveness for foreign investors has dramatically reduced.

• Additionally, lesser dollar inflows are expected from NRIs, especially from the Middle East, this year.

• While rupee depreciation may be unavoidable, other actions can be taken to make investments more attractive and restart the necessary momentum.

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The "Fear Gauge" Opportunity : What Happens When India VIX Crosses 25?

The 20-Year Historical Lens

History suggests that when the "Fear Gauge" (India VIX) spikes, the stock market is often nearing a point of maximum pessimism—which, paradoxically, is often the best time for forward-looking returns. Analyzing data from the last two decades, DSP Mutual Fund examined every instance where the VIX crossed the 25 mark.

This includes major global and local shocks like the 2014 & 2019 General Elections, the Taper Tantrum, the COVID-19 spike, the Russia-Ukraine conflict, and more recently, the Iran-Israel tensions.

The Probability of Profit

The data reveals a compelling trend regarding forward returns after the VIX hits 25. While short-term volatility is a given, the medium-to-long-term recovery is statistically robust:

• Forward Returns (12 Months): In 81% of cases, the index returns were positive one year after the VIX crossed 25.

• The Range: While the maximum returns reached 100%, the worst-case "black swan" scenarios saw a minimum of -55%.

• The Trend: As you move from the 3-month to the 12-month window, the probability of positive returns increases significantly.

The Psychology of the "Exit & Re-entry" Trap

Why does this happen? High VIX levels represent panic. Retail investors often withdraw from the market at the peak of fear (VIX > 25) to "save" their capital. However, they typically wait for the market to feel "safe" again before returning. By the time they reinvest, the market has already rallied, forcing them to buy back at much higher levels. Staying invested—or entering—when the VIX is high allows you to capture the recovery that others miss.

Survival via "Self-Healing" Strategies

The newsletter emphasizes that "staying invested" doesn't mean holding onto "dead wood." Being a passive spectator to a crashing stock that drops from ₹100 to ₹2 is not a strategy; it’s a trap. A successful approach requires a Self-Healing Portfolio:

1. Exit Weakness: Have a mechanism to exit losing positions quickly before they erode capital.

2. Enter Strength: Reallocate that capital into sectors showing new momentum and strength.

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