There have been several spikes of fear in the stock market the past week.
Meaning the fear gauge, the Volatility Index (VIX), reflected many investors, often hedge funds, buying put options that reward them when the indices or stocks they’re betting against go down, in order to protect their long positions.
This was triggered by concern about the new variant Omicron, by the possibility the U.S. Federal Reserve may accelerate its tapering of bond buying and, apparently, forced selling at certain hedge funds after having chased the market and stocks higher only to be whipsawed.
But there’s some fascinating historical data about what happens after the VIX surges above the 30 mark.
Check out this chart.
Below is a chart and brief excerpt from one of this week’s Early Look written by Hedgeye Risk Management Director of Research Daryl Jones.
|The interesting thing about volatility is that it does have some predictable patterns.
Consider the last 10 years of the VIX as an example:
As always, we play the game in front of us. Perhaps this will be the 1 out of 9 times that the S&P 500 loses money? Perhaps not.
As a gauge of volatility, the VIX measures investor psychology. Therefore, a rapidly increasing VIX typically represents the puking (to use a scientific term) of stocks.
But as Warren Buffett famously said:
“Be greedy when others are fearful.”
Related stories: Updated: It’s the Volatility, Stupid