What is India VIX really telling us?

As the domestic equity market halted a seven-week winning run last week, Dalal Street’s fear factor India VIX climbed a near six-month high amid the ongoing earnings season and general elections.

India VIX, a measure of the market’s expectation of volatility in the near term, rose 21 per cent last week, after staying in the 14-19 per cent range since October last year.

The volatility index, which NSE computes based on the order book in Nifty options, jumped to 20.9975 on April 13 from 18.39 per cent on April 5.

Should you panic about the near-term outlook of the market because of the rising VIX? Since volatility is always seen as a risk, it is almost always thought to signal market falls.

Three-year charts of the two signal no correlation between India VIX and Nifty50.

However, a near-term (10 days) view gives a different picture.

An analysis done by brokerage Prabhudas Lilladher showed since 2013, in 55 per cent of the time Nifty has actually enjoyed positive returns in the subsequent 10 days when India VIX has crossed the 20 mark.

Sandip Raichura, Head of Retail, Prabhudas Lilladher, said while rising VIX is indicative of an expected rise in volatility – during budgets, elections and/or plainly during simple market corrections anticipated by large options traders – it is not necessarily deterministic.

“Look at other variables, fundamental and technical, as relying on VIX alone may catch you off guard. At least that is true in more than 50 per cent of the times,” he says.

Nifty shed 22.50 points, or 0.19 per cent, to 11,643 during the week ended April 12 as momentum indicator Moving Average Convergence Divergence, or MACD, signalled a downward crossover for Nifty index. Whenever the MACD slips below the signal line, it gives a bearish signal on the charts, indicating that the price of the security or the index may experience a downward movement, and vice-versa.

“Nifty last week recovered from its key support levels and has managed to sustain above the 11,550 level in last few sessions. With the emergence of bullish candlesticks on the daily chart and positive crossovers seen on the momentum indicators, one can expect a short-term trending action on a decisive close above the 11,700 level,” said Manav Chopra, CMT, Head Research of Equity, Indiabulls Ventures.

He said the index has formed a higher base on the weekly chart, which is structurally positive, and faces immediate resistance at 11,700 level on the upside. Expect Nifty to rally towards the 11,950, 12,250 levels on a decisive close above this mark, he said.