I wrote recently about the unusually low readings in the Volatility Index (VIX), which simply shows the market’s level of comfort or fear. With the uncertainty of the fiscal cliff outcome it was quite curious as to why such protection was not being sought against higher volatility.
I cannot get into the minds of every trader or investor but can only seek to capitalize on what the situation is before it changes. Just less than two weeks ago the VIX was sitting around 15+ and I put this piece together about buying some insurance when it’s cheap. That advice would have paid off nicely, the VIX today hit near 21, or a 20% gain over the last two weeks.
So, the reality of the fiscal cliff is nigh. The market is suddenly showing some fear as if it has been ignoring any bad outcome all along. Can the market be that smart? Or perhaps not so smart?
It’s hard to tell but let’s be clear — no resolution likely means more downside and selling. Want proof? Last Thursday evening had many stomachs in knots as a huge drop in the futures (over 50 handles at one point) was caused by a lack of consensus for the Republicans in the House. Forget about the Mayan Calendar, this seemed to be even worse!
THE BOTTOM LINE
If you have a long portfolio and are worried about too much volatility, the price of insurance is still rather cheap.
You cannot go wrong protecting your gains even if for a short while, and if that happens within a bull trend (if that holds) then dips can be bought. Either way you can insulate yourself against nasty declines harming your bottom line.
= = =
Feature Article:
