Sometimes just turning something upside down can help us to understand it. Anyone who has ever tried the techniques in Drawing on the Right Side of the Brain knows exactly what I am talking about.
The same applies to charts. If a stock looks like a buy on the charts, would you sell it if the chart were inverted? What if I were talking about an index?
Enter the VIX.
If you want to use the VIX to help determine when it is a good time to be long or short the markets, one of the best things to do is to invert it, as I have done in the graphic below. Here you can see that from 2003-2007 the buy on the dip strategy has worked well with both the SPX and the inverted VIX, with the bigger dips providing the bigger opportunities. This should come as no surprise, as in long bull markets any strategy that relies on buying the dips is almost guaranteed to be successful. The larger question is how to distinguish the dips from the extended bear markets.
To help think about this question, I have included the 1999-2003 data, which generally show the dips to be good buying opportunities in the 1-3 month time frame, but subject to the gravity of the bear pull over the longer term.
One other aspect of this chart bears mentioning: if you want to think of the VIX as a fear gauge, it is indicating that current fear levels are on par with that of 2001-2002.
Until further notice, I am still in the contrarian bull camp.