as part of our
Trading on volatility is one of the most dead-simple strategies
you can use to book quick profits.
The formula works as follows…
When the Volatility Index (or VIX) drops below 15, you should be
selling stocks - or at least be taking defensive positions. And
when the VIX is above 30, you should be buying stocks.
That's because higher volatility indicates that investors are
panicking and selling off shares out of fear. And smart investors
swoop in to take advantage of the attractive valuations.
On the flip side, when volatility is low, it shows that
investors are getting a little too complacent, which means that a
correction is likely imminent. For example, the VIX rested
consistently below 15 twice over the past 20 years: In the late 90s
before the dot-com bubble burst and before the Great Recession hit
What about today?
Currently, the VIX is hovering above 16 - and it's dipped
briefly below 15 a few times since August.
So given the indicator's history of spotting a major market
downfall, you should be hitting the sell button now, right?
Not so fast. Other factors are making today's situation much
You see, when the VIX is at 40 or 50, there's no question you
should be scoping out deals right away. Since it doesn't usually
take long for investors to come to their senses - and, in turn, buy
up stocks again.
Unfortunately, the same can't be said when the VIX is low,
mainly because investors can remain complacent for years at a
Especially now that there's one thing sure to keep investors
happy for the foreseeable future: easy money.
Easy Money Keeps Investors in the Game
There's an old adage on Wall Street I'm sure you've heard
before: "You can't fight the Fed." That is, when the Federal
Reserve has adopted an easy money policy, the chances are better
than ever that the market will pick up steam.
More specifically, with interest rates so low, investors are
encouraged to make riskier bets. Meanwhile, activity in the economy
picks up as investors deploy cash in places like real estate - or
purchase goods like cars, appliances, etc.
In other words, as long as there's easy money, a low VIX level
doesn't necessarily mean a correction is on the way.
And since the Fed has indicated that it has no intention of
raising rates for at least two years - longer if necessary - we
might be in the clear for a while.
a wild card on the horizon that could derail this easy money party:
Why? Well, regardless of who gains control of the White House
come November, there's going to have to be some serious negotiation
about taxes and spending.
Now, before you fall out of your chair laughing at the prospect
of anything "serious" coming out of Washington, consider the
implications of nothing being done at all…
Taxes will rocket higher. Spending cuts will make it into the
public sector. And the combination of the two could spank the
market to the tune of 20% or more. It's a sobering prospect, to be
The good news is that the current low VIX level shows investors
believe that some deal will be made. However, since we've been
trained to expect the unexpected, it may be a good idea to check
your positions and initiate some defensive measures between now and
the New Year.