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S&P 500 Vs. VIX (Volatility Index)

The graph above is of the S&P 500 since 1987 compared to the VIX Volatility Index. The VIX is a graphical representation of fear in the market based upon option activity.

The VIX today got over 47, which we haven't seen since the height of the post-911 & Nasdaq Crash.

Every time that the market has reached this level of fear, it has been a buying opportunity as the market moved higher. You can see this in the 2002 / 2003 time frame that as volatility eased up and fear left the market, the market moved up as earnings moved up.

We stuck our toe in the water today with some of the significantly hardest hit stocks that have strong earnings and balance sheets. Today was very much an overreaction to the news that Congress did not pass the rescue bill. Tomorrow may be an ugly day as well given that the overseas markets are currently closed and will undoubtedly react badly to this news. These markets are our creditors, so it could get hairy before it gets better, and if it does we will make additional selected buys.

Buying when the VIX gets to extremes has always paid off, if not immediately, then within a few weeks. During a bear market like this one with violent market swings, emotions rule. It is always important to invest contrary to the emotions because they always swing back to fundamentals. By taking some oversold positions, and setting target sales prices 7% to 15% above your purchase price, you are able to offset some of the impact of the broader market decline.

We have used this strategy extensively this year, particularly during September, to much success. I anticipate that we will likely have to continue to employ this strategy until the bear market ends.