The VIX is Spiking: Time to Buy Tesla Shares After Huge Sell-Off?

The CBOE Volatility Index (VIX) is among the key factors many investors are focusing on now, more than they have in years. That’s because for the better part of the past five years (since the onset of the pandemic), this index has remained very low, and often hovered around historical lows. Calm in the VIX suggests minimal volatility, with orderly price action in the market and investors feeling relatively confident around where equity markets are headed over the medium-term. 

That said, volatility has begun to pick up, right around the time of the Trump election victory. Investors began to price in a range of potential policies, with many differing policies having potential different impacts on certain companies and sectors.

Unsurprisingly, Tesla (NASDAQ:TSLA | TSLA Price Prediction) has been among the most closely-watched stocks following the Trump election win, with shares of the EV maker surging to a new all-time high shortly after president Trump was announced to be returning to the White House. However, since Inauguration Day, shares of TSLA stock have been on a significant downturn, dropping for seven straight weeks and now trading roughly 50% below its recent all-time high.

With such a voracious move in such a short amount of time, investors are right to take a cautious tone right now. But with the VIX trading where it is, and sentiment approaching recent lows, let’s dive into whether this means Tesla could be a buy here. 

What Is the VIX?

A newspaper with the headline “volatility ahead”

First, let’s dive into what the VIX actually is.

I remember when I first started out in the world of finance, I’d hear a lot of discussion around “the VIX” as some sort of shadow entity that makes big moves in times of turmoil.

While that’s broadly descriptive of what this index measures, the VIX more specifically measures market uncertainty using S&P options expiring within 23 to 37 days. Notably, declining liquidity in these options, as traders favored zero-day contracts, contributed to volatility spikes. So, in August, illiquid markets widened bid-ask spreads. This caused the VIX to overstate investor fear, according to experts, and highlights some of the concerns around using this metric as the only one in measuring true market sentiment from time to time.

That said, while the VIX’s reliability as a panic gauge had weakened, there’s good reason why many investors still rely on this indicator as a key factor in gauging investor sentiment. Implied volatility using options is generally one of the most accurate ways investors can measure how investors are feeling (how much they want to hedge long or short positions), and in a well-functioning market, this indicator works well. 

With the VIX currently down below 25 at the time of writing (but above 27 during yesterday’s session), there’s some signal that at least over the short-term investors aren’t as outright bearish as they’ve been in recent days.

Tesla Stock Rebounding 

Aside from the VIX calming down somewhat, Tesla investors can be extra reassured by the recent moves in Tesla stock. The EV maker saw its shares close higher yesterday, and are up 8% Wednesday, suggesting investors who bought the dip are currently being rewarded.

Of course, where the stock heads from here remains to be seen. But with so many experts pointing to the recent sharp downside moves in Tesla taking place in lieu of relatively solid underlying fundamentals and being driven by broader macro forces (with the VIX certainly a factor in the market-wide panic being seen), we’ll have to see if this rally can continue from here.

My take is that Tesla certainly does look much more attractive today than it did heading into the election. This rally certainly can be sustained. However, if we see selling at the index ETF level, no stock will truly be safe. Those, like Tesla, with outsized weightings in such indices could continue to see more downside from here.