The VIX index is a poor predictor of huge crashes in the market. Sure, it indicates volatility expected in the short term, but volatility is price movement expected on either side. This tells us nothing about whether the market expects a huge downside (Which is what investors are worried about). The VIX is probably useful for people who trade Options, but I don’t see how it can be relevant to investors.
The SKEW index, on the other hand, measures exactly this. It measures how much the market is willing to pay for Put Options in comparison to Call Options (No, Put-Call Ratio does not measure this). Unfortunately, the SKEW index for the SENSEX/NIFTY is not calculated or tracked anywhere. However, even the SKEW index is proved to be a very poor predictor of huge market crashes.
So, how do we predict if there is a huge crash ahead? Simple. We can’t.
My favorite quote out of that comes from Peter Lynch: “I can’t recall ever once having seen the name of a market timer on Forbes‘ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”