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
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 (
, 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.
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
sentiment indicator. If either of these levels is breached, traders
look for a
in the market.
With that information in hand, a look at the chart below says it
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
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
oil spill and high unemployment in the United States, among other
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
If you think we're in for more volatility down the road, then the
iPath S&P 500 VIX Short-Term
makes a lot of sense as a portfolio
. As Nathan Slaughter, Chief Investment Strategist of
, puts it, this fund is literally designed to profit from fear
Action to Take -->
VXX holds rolling first and second month
contracts, so investors need to keep in mind that it won't track
the VIX perfectly. And investors will need to be cautious -- the
market can turn on a dime and this isn't the type of holding to
have when things cool down. But if you think fear will continue to
rule the market, then VXX looks like a good bet.
Disclosure: Brad Briggs does not own shares of any security
mentioned in this article.
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