Volatility and ETFs: The “VIX” Has Nailed Every Buying Opportunity
11 September 2008 at 12:07 pm by Gary Gordon
They say hindsight is 20/20. Yet a chart of the the CBOE Volatility Index (VIX) offers rear-view mirror, night hawk vision.
I’ve talked about buying opportunities using the VIX in previous posts. You may want to brush up on your understanding of stock market volatility by reviewing my earlier commentary.
In essence, a VIX that spikes above 30 often presents traders and investors a low-risk entry point. Traders can use stop-losses or stop-gains to to lock in a profit. But what about investors?
Since it is impossible to pick bottoms for a bear, or a top for a bull, investors must have a longer-term time horizon. Therefore, while buying stock assets when the VIX tops 30 has prove to be an excellent low-risk entry point, it hasn’t led to immediate gains.
It has, however, led to acquiring lower share prices through purchasing incrementally over time. For example, let’s say you believe that mid-caps represent a sweet spot when the U.S. economy begins to improve. How would you have done by purchasing shares of Midcap SPDR (MDY) each time the VIX topped 30?
| 2007-2008 | MDY | |
| August | 148.06 | |
| November | 152.31 | |
| January | 135.61 | |
| March | 136.33 | |
| July | 145 | |
| Average Price | 143.46 | |
| 9/10/2008 Closing Price | 141.45 | |
Investors who use a 30+ VIX as a buying opportunity did not make money. Yet, ostensibly, they’ve been purchasing in-and-around low points in the market and simultaneously lowering overall risk.
In a future bull market stampede, we won’t have to contend with excess volatility. Perhaps we will see a similar chart pattern to the 3/03-7/07 bull market run, where the VIX approached the 25 level in the 2006 correction and and the March 2007 China scare. That was it! No 30+ readings.
For now, however, embracing the premier fear gauge at 30+ sets you up nicely for the future. Note: Fan/Fred/Lehman has yet to push the VIX higher than 26ish, and that may mean… there’s another wave of fear yet to hit.
If and when another wave of fear does hit, you may want to buy broad market, early stage recovery ETFs. I would look closely at the Midcap SPDR (MDY) and the iShares Small Cap Value (IJS).
Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.
