Wednesday, October 5, 2011

VIX: The Fear Index

We all know that we have to be greedy when others are fearful and fearful when others are greedy.  Well, here's an interesting chart:

The VIX index: 1990 - Now

I don't intend to make market calls, bottoms and things like that.  That's really not my thing at all. But I will mention things when I see something interesting.  The VIX index, an implied volatility index of stock index options for the S&P 500 index is usually pretty good at calling market bottoms.   This fear guage, when it spikes up above 30% usually signals a market bottom.  During the worst of the 2008 crash, post-Lehman, this spiked up to around 80%.   This recently popped up to above 40% and now is around 39% or so.

It is usually not a great idea to be short the market in that situation, and also it is usually a good time to buy, at least for the short term.

The VIX: The Last Five Years

Here is a closer look at it, just focusing on the last five years.

I know, I know.  I keep saying I won't talk about Buffett, then talk about Buffett.  Then I say I don't predict the stock market, and here I am trying to call a bottom.

And yes, I don't do charts.  But this is a chart.  I know.

The VIX is one of those indicators that have proven to be very valuable over the years, so I thought I'd mention it.

Between this fear guage showing extreme fear and Greenblatt's comment the other day that the market is priced cheaply, in the 95% percentile of cheapness, and the fact that Warren Buffett is trying to buy his stock at 1.1x book and a few other indicators seem to point to pretty decent stock market returns going forward.

Be warned, however, that even with the VIX level high, the market can still go much lower!  If you bought stocks when the VIX spiked up above 40% back in 2008, you would still have had to sit through some scary down days. 

These are just some encouraging signs, not some sure-thing signal that says to buy stock on margin and get rich quick.

Plus I have to admit that I am still experimenting with this blog and am trying to get used to putting charts and tables into the blog (you may have noticed that I have had trouble creating tables by hand here).

No comments:

Post a Comment