So far today, it appears the market is ambivalent. Either the sellers are exhausted or the buyers are wary but in the game. It reminds me of two fighters parrying. How it will end up today is any one’s guess.
My suggestion at this point is the same as the one below, which is the same as the message I have been iterating for some time now.
- Don’t freak out if the market tanks. Getting caught up in short-term market frenzy can be a little like measuring the distance of a marathon on your hands and knees with a ruler.
Yes, stay in the game and keep your eye on the horizon. Don’t fear the current tempests in a teapot. Both the US budget deal and the increasing economic momentum point to a positive longer-term market.
- The House has overwhelmingly approved a two-year budget framework that will remove the threat of a shutdown during the period.
- Ford plans to add 5K new jobs next year in the U.S. as it plans for an increase in production. The automaker says it will open three new manufacturing facilities in 2014 to help it launch a total of 23 new vehicles in global markets.
The bouts of volatility that appear from time are about fear in the moment. These “moments” are opportunities to build positions or to trade aforementioned volatility.
- You’ve got better tools, remember? VIX, for instance, can help you measure short-term market moves for longer-term positioning. In fact, if you’re scared, that likely means that everyone else is too. And that’s just the kind of crowd mentality that might bring around potential buying opportunities.
I have written about the Volatility Index (VIX) before. It is also known as the fear gauge. It is an excellent tool to assess the reality of market sell-offs. Recently, it has been rising, primarily on the belief that the market is and will react to the impending QE tapering. Corresponding to that, the market has sold off. Today the VIX is flat or dropping slightly and the market is, well, flat or rising slightly. My point is, use the VIX as a tool to better understand market movement.
To better understand how the VIX reflects market sentiment, consider the following data regarding the record high of the VIX.
- The VIX Index reached its all-time intraday high of 89.53 on October 24, 2008. (Prior to 2008, the highest VIX level was 49.53 on October 8, 1998.)
Currently, the VIX stands at 15.4, give or take. My point here is we are a long, long way from the market tanking and we are a long way from the market correcting 10% or more. Sure, anything can happen, but a major correction in this current economic and political environment, seems unlikely, as fear is low and positive sentiment is rising. The reason both are what they are is, as I have stated innumerably, corporate profits continue to grow. Investors believe in the longer term future of the market.
Here are two charts that graphically represent my point. The first is a 1-month chart of the VIX compared to the S&P 500 and the second is a 1-day chart showing the same comparison. The bi-polar nature of these charts says it all.
So, as I finish up here, the market is pushing more strongly into the green and the VIX is dropping more into the red. Yup, use the VIX to gauge overall market movement and what it says now is buy the dips. Oh, here is one more reason to consider the economic future bright.
- Three years after going cap in hand to international lenders, Ireland has officially ended its bailout, providing a landmark for the euro zone’s efforts to resolve its debt crisis.
Portugal is soon to follow Ireland out of the bailout program, Italy is pulling itself together, and Spain is coming along as well. Poor Greece is still mired in economic muck, but that country is not a global economic concern. Do you remember what the hilltop screamers were saying just one and two short years ago?
Trade in the day; Invest in your life …
