Paul Price: Don't Fear "Fear"

Welcome to MutualFunds.com

Please help us personalize your experience and select the one that best describes you.

Your personalized experience is almost ready.

Join other Individual Investors receiving FREE personalized market updates and research. Join other Institutional Investors receiving FREE personalized market updates and research. Join other Financial Advisors receiving FREE personalized market updates and research.

Thank you!

Check your email and confirm your subscription to complete your personalized experience.

Thank you for your submission

We hope you enjoy your experience

Channels

Find the latest content and information here about the 2019 Charles Schwab Impact Conference.

Advisors

Receive email updates about fund flows, news, upcoming CE accredited webcasts from industry thought leaders and more.

Content focused on helping financial advisors build successful client relationships and grow their business.

Content geared towards helping financial advisors build better client portfolios.

Get insights on the industry trends and investment news from leading fund managers and experts.

Paul Price: Don't Fear "Fear"

Paul Price at NYSE
Even the most steadfast bulls tend to freeze, like a deer in the headlights, when extreme volatility reigns. Value investors have been taught to, “Buy when blood is in the streets.” Actually doing that is much tougher than knowing it’s the correct play.

Tracking Volatility

Easily accessible data is available to let you know when bargains beckon. The CBOE’s Volatility Index, a.k.a. the VIX, a.k.a. the Fear Index, spiked on Oct. 15th, after the DJIA plunged 460 points intraday. The VIX settled at its highest level in more than two years.

Traders generally bid up the VIX only after the market has taken a big hit. They are desperate to hedge their long positions by owning something that will rise in value if equity prices continue dropping.

Volatility pricing can move much faster than the market itself. A 25% or greater premium to the underlying change in the S&P index (SPX) indicates intense fear. Scared traders dump stocks just for peace of mind. They no longer care about intrinsic value. They simply demand less risk.

Moods and share prices can continue on negative paths for a while, but periods of ultra-high VIX prices typically occur within just weeks or months of major bottoms.

When VIX Flies, Investors Should Buy

The most elevated volatility readings of the last five years were spectacular times to be buying equity mutual funds. The green arrows I placed on the chart to the right show market action at times of peak VIX.

Those with reasonable time horizons were never disappointed. The most recent spike on October 15, 2014, will likely add to the list of most wonderful times to increase exposure to stocks.

Students of market history might be curious to back check this theory to before 2008’s financial meltdown. The CBOE has provided us with a great chart superimposing the SPX and the VIX since 1990.

superimposing the SPX and the VIX since 1990
Greater than 25% VIX premium periods generally showed the same great results that we saw in more recent years. Using high VIX as a buy signal only produced two major fails.

A high VIX did not protect against buying too soon after the outrageous excesses of the March 2000 pinnacle. Stocks were so expensive that it took longer than normal to see a rebound. The skyrocketing VIX after the 9/11 terrorist attacks gave a much more timely BUY indication.

VIX prices ramped up to about 30 in late 2007 to early 2008, preceding a short rally. The broad market, however, crashed much lower in the fall of that year after Lehman’s bankruptcy and AIG’s bailout. That year’s sell-off was more credit related than due to valuation excesses.

On November 20, 2008, VIX closed at a stunning 80.86. That turned out to be the point of maximum panic even though it took until March 9, 2009, for momentum to reverse completely. Maximum pessimism meant enormous profits for fund buyers who recognized off-the-charts volatility as a reason to buy. The S&P 500 more than tripled from its eventual low, just three and a half months later.

There is never a time when stocks cannot go lower. The old saying that, “You don’t get hurt jumping out of basement windows,” still applies though.

The Bottom Line

Sky high VIX has flashed few false signals over the last few decades for those who realize it is a contrary indicator. The takeaway from all this? By the time folks feel good about buying portfolio insurance, stocks are already beaten up enough to be bought, not sold.

If you’ve enjoyed this article, sign up for the free MutualFunds.com newsletter; we’ll send you similar content weekly.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next

Paul Price at NYSE

Paul Price: Don't Fear "Fear"

Even the most steadfast bulls tend to freeze, like a deer in the headlights, when extreme volatility reigns. Value investors have been taught to, “Buy when blood is in the streets.” Actually doing that is much tougher than knowing it’s the correct play.

Tracking Volatility

Easily accessible data is available to let you know when bargains beckon. The CBOE’s Volatility Index, a.k.a. the VIX, a.k.a. the Fear Index, spiked on Oct. 15th, after the DJIA plunged 460 points intraday. The VIX settled at its highest level in more than two years.

Traders generally bid up the VIX only after the market has taken a big hit. They are desperate to hedge their long positions by owning something that will rise in value if equity prices continue dropping.

Volatility pricing can move much faster than the market itself. A 25% or greater premium to the underlying change in the S&P index (SPX) indicates intense fear. Scared traders dump stocks just for peace of mind. They no longer care about intrinsic value. They simply demand less risk.

Moods and share prices can continue on negative paths for a while, but periods of ultra-high VIX prices typically occur within just weeks or months of major bottoms.

When VIX Flies, Investors Should Buy

The most elevated volatility readings of the last five years were spectacular times to be buying equity mutual funds. The green arrows I placed on the chart to the right show market action at times of peak VIX.

Those with reasonable time horizons were never disappointed. The most recent spike on October 15, 2014, will likely add to the list of most wonderful times to increase exposure to stocks.

Students of market history might be curious to back check this theory to before 2008’s financial meltdown. The CBOE has provided us with a great chart superimposing the SPX and the VIX since 1990.

superimposing the SPX and the VIX since 1990
Greater than 25% VIX premium periods generally showed the same great results that we saw in more recent years. Using high VIX as a buy signal only produced two major fails.

A high VIX did not protect against buying too soon after the outrageous excesses of the March 2000 pinnacle. Stocks were so expensive that it took longer than normal to see a rebound. The skyrocketing VIX after the 9/11 terrorist attacks gave a much more timely BUY indication.

VIX prices ramped up to about 30 in late 2007 to early 2008, preceding a short rally. The broad market, however, crashed much lower in the fall of that year after Lehman’s bankruptcy and AIG’s bailout. That year’s sell-off was more credit related than due to valuation excesses.

On November 20, 2008, VIX closed at a stunning 80.86. That turned out to be the point of maximum panic even though it took until March 9, 2009, for momentum to reverse completely. Maximum pessimism meant enormous profits for fund buyers who recognized off-the-charts volatility as a reason to buy. The S&P 500 more than tripled from its eventual low, just three and a half months later.

There is never a time when stocks cannot go lower. The old saying that, “You don’t get hurt jumping out of basement windows,” still applies though.

The Bottom Line

Sky high VIX has flashed few false signals over the last few decades for those who realize it is a contrary indicator. The takeaway from all this? By the time folks feel good about buying portfolio insurance, stocks are already beaten up enough to be bought, not sold.

If you’ve enjoyed this article, sign up for the free MutualFunds.com newsletter; we’ll send you similar content weekly.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next