How to track the sharemarket volatility index

When it comes to the stock market, there are two metrics the big end of town follow - momentum and volatility. In simple terms, they're looking to identify the direction and strength of a move as the market changes from equilibrium to disequilibrium.

Momentum and volatility arise from periods of disequilibrium, and if we understand this we can use tools such as the volatility index to provide an indication of the direction and strength of the market. In Australia, it's the S&P/ASX200 VIX Index that measures volatility to provide insights into investor sentiment and expected levels of market instability.

So, how can investors use this information? By studying the VIX, you can identify the sentiment of the market at any given point in time, which means you can avoid making poor decisions while at the same time potentially profiting from this knowledge.

Right now, the S&P/ASX 200 VIX has been falling over the last month, which suggests market volatility is low. Volatility is considered low when the VIX is below 12 and this month it has fallen to 8.8 and is currently sitting around 11.9.

In the last decade the VIX has only fallen to eight or below on a few occasions and when it does the market turns bullish. This is not a blanket rule, as investors still need to research specific stocks to buy, but by researching the VIX it does give investors' confidence that if they buy a stock the market is highly likely to support it.

What are the best and worst performing sectors this week? 

The best performing sectors include Communication Services up more than 1% followed by Industrials and Consumer Staples, which are both just in the green. The worst performing sectors include Materials down more than 2% followed by Financials and Consumer Discretionary, as they are both just in the red for the week.

The best performing stocks in the ASX top 100 include Stockland up more than 4% followed by Mirvac Group up more than 3% and Transurban Group up more than 2%. The worst performing stocks include Mineral Resources down more than 8% followed by South 32 down more than 6% and Bluescope Steel, the A2 Milk Company and Lynas Rare Earths, which are all down more than 5%.

What's next for the Australian stock market? 

In the past couple of weeks, the Australian stock market has largely been following the script I laid out in my previous reports, as it has fallen over seven consecutive trading days with the index currently down around 1.6% since the high on April 17.  While I am expecting the market to be bullish this year, investors need to understand that markets don't just trade straight up, there will be down moves like we are seeing now. History demonstrates, that on average, the market achieves its lowest returns in May and June although there are occasions when these months are bullish.

I still believe the current move down will be short-lived and I expect the All Ordinaries Index may only have one more week down. That said, we need to expect that it may fall for a few more weeks from its current level down to around 7330 points.

Short of sounding like a broken record, investors need to remain patient over the next week or two until the market confirms it has completed its current down move. Jumping in early with the expectation that a bull market will unfold is not a wise move.

While I have said the market appears to be unfolding as expected, there have been many occasions since the COVID collapse where the market has changed in a heartbeat with volatility rising quite strongly and investors are left holding stocks that are falling in value.

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