The Market Is Giving Off A Buying Signal

The last 20 times the VIX  index came north of 20 points, the S&P 500 realized a gain of 9 percent in the 3 months after that. After 6 months this was even 13 percent, says Brian Stutland, CIO of Equity Armor Investment.

Investors have been generously rewarded when they bought stocks on a VIX breakout, in Stutland’s opinion. The VIX broke out last Friday by 10 percent to 22. Although the VIX dropped a bit on Monday, it remained north of 20.

The VIX is also often called the ‘fear index’ because it has the tendency to go up in volatile times. That is because the VIX reflects how many investors are actually prepared to pay to hedge against market drops. The bigger the fear, the more people that want to hedge in the form of put contracts.

Sell-Offs In The Market

Next to the fact that the index is a good measure of fear, it also correlates with sell-offs in the market. However, when the VIX rises above 20 it usually means that the bears are retreating and that new opportunities will arise for the bulls.

20 is not the magical number, says Stutland, although he does believe that everything above that level does represent actual fear and not a level of volatility in the market. Because the VIX reflects option prices, it is a good indicator of how much investors think that stocks will move.

But when the VIX gets too high, the index stops reflecting actual moves around stocks and it becomes a measure of the fear in the market and the negative sentiment. When fear is at its highest, buying opportunities arise in the market. Stutland loves to buy fear, he says.