The market downdraft of the past few weeks has been accompanied by an event that has happened only six times in the past 24 years – a move above 40 in the VIX. At its Monday close of 42.44, the CBOE Volatility Index stands in rarified territory relative to its history, which dates back to January 2, 1986. At this level, is it time to heed the old adage “When the VIX is high, it’s time to buy”? History shows that the odds favor the buyer at this level, but a few outlying data points indicate that an element of caution is warranted.

A look at the historical VIX data – which is available on the CBOE website – shows that the volatility indicator has spiked above 40 on five different occasions prior to the current period: the 1987 crash, the 1998 selloff associated with the collapse of Long Term Capital Management, the aftermath of September 11, and the panic lows that followed the technology and housing bubbles (2002 and 2008). The VIX receded quickly in 2001, but on the other four occasions it lingered above 40 for quite some time. The number of sessions between the first cross of the 40 level and the final decline below 40 is shown below.

In terms of returns, history shows that buying when the VIX is above 40 usually pays off  – particularly in the one- to three-month periods immediately following the initial spike above 40. The table below measures the price return of the S&P 500 in various intervals starting with the first cross above 40:

Note that in most cases, the market begins to move higher even as the VIX remains elevated, indicating that investors remain wary well beyond the point where it would have paid to buy the dip. In the 2008-2009 downturn, for instance, the market bottomed on March 11, 2009, but the VIX didn’t fall into the 30s until April 17.

Consider these numbers for what they are – a historical review. While the averages show that taking advantage of a 40+ VIX can pay off, the events of 2008 demonstrate that trying to take advantage of elevated fear is no sure thing. On that occasion, of course, a steady flow of bad news caused the market to crumble for over five more months, sending the VIX into the 80s. The case of 2001-2002, where stocks initially rallied but didn’t reach their final low until more than ten months after the attacks, indicates that a buy-and-hold approach also isn’t perfect. Still, going against the grain has provided outstanding return potential more often than not.