Will it ever end? It
seems like one day the
Dow Jones Industrial
Average swings up +200
points and then gaps
down -300 points the
next. Several weeks of
that is enough to make
most investors nauseous.
But a simple change in
attitude can fix all of
that.
You've heard the adage
"be greedy when others
are fearful." There's a
way to do just that.
But first, let's take a
look at just exactly how
fearful investors really
are. We do this by
looking at the
Volatility Index (VIX),
also known as the "Fear
Index."
The Volatility Index is
based on data collected
by the Chicago Board
Options Exchange. Each
day, the CBOE calculates
a number based on prices
paid for puts and calls
for the S&P 500. This
number gives traders an
idea of the implied
volatility in the market
for 30 days.
A
VIX reading above 30
generally means the
market is relatively
volatile and investors
are fearful, while
anything below 20
implies a period of low
volatility and a calm
sentiment among
investors. Keep in mind
that the
index is a
contrarian sentiment
indicator. If either of
these levels is
breached, traders look
for a
turnaround in the
market.
With that information in
hand, a look at the
chart below says it all.
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Remember: the Volatility Index is a contrarian indicator. Markets usually turn when the index fluctuates to one extreme or another. And while the index has spiked, we're still well off the elevated levels of volatility we experienced during the financial crisis. During that time, the VIX broke 80.
As a result, it took a long time to get below 20. As soon as it did, markets tanked and volatility spiked, leading to a roller coaster May.
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So what's next? Well,
the market is still
behaving like an
angst-ridden teenager
right now. It's calmed
down a bit (the VIX is
hovering around 30 right
now), but we're still
not in normal territory
yet. Investors are still
anxious over the
European debt crisis,
the BP (NYSE: BP)
oil spill and high
unemployment in the
United States, among
other things.
These aren't facts
investors probably
didn't already know and
these problems have had
a bad habit of lingering
for longer than what
many expected. There's
no reason to think
they'll go away any time
soon, so the best we can
do is try to figure out
how to make a little
money from this. And
besides, investors seem
just jittery enough to
send stocks plunging on
the next piece of bad
news anyway.
If you think we're in
for more volatility down
the road, then the
iPath S&P 500 VIX
Short-Term Futures
(NYSE: VXX) ETF
makes a lot of sense as
a portfolio
hedge. As Nathan
Slaughter, Chief
Investment Strategist of
StreetAuthority's
ETF Authority,
puts it, this fund is
literally designed to
profit from fear itself.
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