The Volatility (VIX) Index and What it Means to Investors

The Volatility (VIX) Index and What it Means to Investors

The Volatility (VIX) Index and What it Means to Investors

$DIA, $SPY, $QQQ, $VXX, $GLD

The Chicago Board Options Exchange Volatility Index (VIX) usually moves opposite to the stock market, meaning when stocks are up, the VIX is down, and vice versa.

But lately, even though the S&P 500 is on the rise, the VIX is climbing too.

Many experts believe it indicates a major selloff is looming, and possibly other dangers to follow.

So, let’s take a close look at exactly what the VIX is and what its movement means as the stock indexes hit all-time highs.

The Big Q: What is the VIX?

The VIX is known as Wall Street’s fear index. It’s a measurement of expected volatility in the S&P 500 over the next 30 days. Rather than measure different stock prices individually, it averages a few of them together, looking at their current movement and how they are expected to move in the foreseeable future.

It takes the amount by which the S&P is expected to vary over the next 30 days, takes the square root of that number, and multiplies it by 100 to get the VIX index number. By doing this, it can estimate whether stocks are likely to rise or fall going forward.

Since the movement of the VIX is based on the movement of certain stocks, you can usually trace a major surge to some specific catalyst.

Next Big Q: What does it mean when VIX and S&P are rising together?

The Big A: A selloff looms…

The S&P 500, the DJIA and the NAS Comp have been rising quickly, particularly since the November 8th Presidential election.

The S&P 500 rose 3.5% in February, hitting a record high of 2,351. In the 1st week of March, it saw another spike and even more record highs.

Meanwhile, the CBOE VIX has been going up too, at almost exactly the same rate.

What this shows is that, even though stocks are rising, people are worried that it will not last, and are buying insurance.

VIX: 10.96; -0.85
VXN: 11.77; -0.94
VXO: 10.08; -1.92

Put/Call Ratio (PCR) CBOE: 0.94; -0.08. Jumped over 1.0 Tuesday and Thursday, it looks like some insurance buying.

Last week Fed Chairwoman Janet Yellen has said that March would “likely” bring another interest rate hike, which sometimes leads to an immediate fall in stock prices.

Furthermore, investors are worried that these record highs in both the DJIA and S&P are a bubble on the verge of popping.

What all of this comes to is the likelihood of a selloff sometime in the near future. Stocks will go down, but fear will continue to go up, leading to investor panic and a major decline.

The Next Big Q: What can be done to prepare for this selloff and its aftermath?

The Big A: Knowing in advance about this impending fall of the S&P 500 gives gives investors time to protect themselves. The best way to do that is by investing in a safe-haven.

And the safe haven most closely tied to the VIX is Gold.

Gold is the asset people turn to when they fear stock market volatility, as Gold maintains its value over time, it tends to go up when stocks go down.

Therefore, a rise in the fear index nearly always correlates to a rise in Gold as well. Since Y 2001, a spike in the VIX has led to a spike in Gold 6 months later, almost every time, by anywhere from 1% to 22%, the average rise has been about 9.1%.

Gold has gone up nearly 6% YTD, and is likely to rise even higher in the coming months. When the equity markets do fall, Gold will go up in response.

Another option is to buy the VIX.

While you cannot buy shares of it directly, you can buy futures contracts in it. In theory, this means that as S&P volatility rises and stocks go down, your VIX investment will rise.

However, in practice, VIX futures often end up being more expensive than the actual VIX index, causing one to lose money in the long run. It takes an expert trader to trade the VIX profitably.

The correlation between the VIX and Gold is actually more reliable, making it the safer investment.

On the surface, the markets seem to be doing well in here, the trend remains up.

As the DJIA and S&P both continue to break records, it can lull investors into a false sense of security. But remember, the story the VIX tells shows that it is likely already on the verge of a Fibo correction.

Pay attention.

When stocks lose their value, Gold investment picks up the slack and prevents holders from suffering what might otherwise be a painful loss.

Monday, the US major stock market indexes finished at: DJIA-51.37 at 20954.34, NAS Comp -21.58 at 5849.19, S&P 500 -7.81 at 2375.29

Volume: Trade on the NYSE came in at 966.1-M/shares exchanged

  • NAS Comp +8.7% YTD
  • S&P 500 +6.1% YTD
  • DJIA +6.0% YTD
  • Russell 2000 +2.0% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Neutral (0.23) Neutral (0.19) Neutral (0.20) Bullish (0.29)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Neutral (0.24) Neutral (0.19) Bullish (0.25) Bullish (0.29)
HeffX-LTN Analysis for QQQ: Overall Short Intermediate Long
Bullish (0.44) Bullish (0.33) Very Bullish (0.50) Very Bullish (0.50)
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Bearish (-0.45) Bearish (-0.32) Bearish (-0.49) Very Bearish (-0.54)
HeffX-LTN Analysis for GLD: Overall Short Intermediate Long
Neutral (0.10) Neutral (0.01) Neutral (0.00) Bullish (0.28)

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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