As market participants we often look for reasons of market behavior. Some are rational and explainable but others are not. Call it the ‘mystery of markets’. Frankly, it really is no mystery at all, it is simply about money flows in and out. Yet, our minds look for the most complex reasons for moves, as if we are trying to solve a difficult puzzle. The rise and fall in volatility is one of those conditions that continues to confuse market players.
There is an old saying, ‘When the VIX is high, it’s time to buy – when the VIX is low it’s time to go’. Simply put when fear is rising and peaking it is time to close your eyes and just buy. We have seen spikes in VIX become tremendous buying chances over the last several years.
Conversely, a low VIX implies complacency and lack of fear – a bold ego that says I have nothing to worry about, stocks are going up always. Often a bad move, because once the buying stops there is nothing left but sellers – then corrections ensue. Who can predict the timing of these events everytime? Answer is simple – nobody.
So today we have a VIX that closed around 10.4% on Jan 27. That is low, but just because it is low is not a sell signal. It is certainly indicative of ‘buyer fever’, and even if the VIX climbs 30% up to a level of 13 the stock market is likely to decline, perhaps around 2%. It could happen anytime. With a low VIX it means options are cheap – so protect your portfolio buy adding some at the money puts on the indices. I use SPY, QQQ, IWM and DIA – some of the most liquid names. The time to buy protection is before you need it, not after a disaster strikes.