Karpel’s Corner: Is Volatility Signaling a Bounce in the Market?

Welcome to Karpel’s Corner. This is where I throw out my thoughts on the markets and share some of my favorite strategies. I keep it market-focused, and never miss an opportunity to teach trading strategies and commentate on the latest trends affecting the financial markets. Hope you enjoy today’s post!

In the last two weeks we have seen the Fear Index ($VIX) go from 15 to 30, now back to 15. Moves of this type have only occurred on two other occasions within this calendar year, mid-February and mid-August. There was a spike in Volatility ($VIX) in each of these cases and the S&P 500 pulled back only to resume a stronger up trend to new highs.

Historically, volatility as an indicator rises when the S&P 500 falls, and falls when the S&P 500 rises. Similar to the S&P 500, the $VIX also trends for extended periods.

Speaking of history, the $VIX peaked around 48 in August 2012, worked its way lower for almost two years, then dipped below 11 in July 2014. The action over the last two weeks exemplifies how the $VIX is superb for identifying periods of extreme fear or panic selling, which we saw in mid-October S&Ps.

The market has retraced that pullback with the $VIX finishing yesterday at $14.39. This could be an indication that fear is indeed subsiding. This action in February and August was a signal that new highs in the S&P 500 were on the horizon. You can take this $VIX signal with a grain of salt. Remember, past performance does not guarantee future performance. While $VIX is an established Fear Indicator; tread the bullish territory lightly.

We suggest only buying Tradespoon Conviction list stocks with a short and long term rating of 10/10. It is good to scale into long positions at 25-50 percent of total position intervals.

See you next time at the Corner!