Early Volatility to Begin the New Year

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Half way through the first month of 2015 the S&P 500 is down 2.5%. Terrorism, a European recession, bad earnings and other headlines have investors across the globe are running into safe investments like government bonds. This January move actually reminds me of what happened just a year ago in 2014. The S&P 500 finished January of 2014 down -5%. That was the low point of the year as the U.S. market rallied to finish the year up 14%.

This volatility to begin the year shouldn’t cause anyone to panic. It shouldn’t cause people to worry that the six year bull market is over. Rather it should be an opportunity. Let me explain . . .

There is a “fear index” in the market known as the VIX (S&P 500 volatility index). To keep it at a very, very basic level, when it spikes higher there is “fear” in the markets. When the VIX spikes higher the S&P 500 is usually pulling back. When this spike in the VIX occurs smart investors should be considering buying those stocks or ETFs that they have been waiting to buy. Let me illustrate . . .

Below is a chart of the VIX and the S&P 500. I have highlighted those moments when the VIX has spiked along with the corresponding rally in the S&P 500. As you can see that when the VIX approaches or breaks through 20 it’s typically a good time to build a long position or perhaps sell some puts.

 

VIX SPX

 

Let me make one thing very clear . . . no one ever knows exactly what the market is going to do. However, if the current uptrend in the market stays intact we will use the VIX to help us know what to do. You no doubt have heard the term “buy the dips” . . . this indicator helps you in the application of that famous saying.

Successful investing!

 

This is not a recommendation to buy or sell a security. This is for educational purposes only and is generic in nature. It is not suitable for everyone’s goals and objectives. If you have questions please contact Brett Pattison at brett@igga.dev

 

 

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Categories: Markets and Strategy.