When Investments Are Volatile Should You Sell or Buy?

When Investments Are Volatile
Should You Sell or Buy?
By www.ProfitableInvestingTips.com

http://profitableinvestingtips.com/options-trading/when-investments-are-volatile-should-you-sell-or-buy
The stock market has been in a selling
mood for the last two weeks and the
bears are predicting more of a selloff.

The VIX indicator of market volatility
is roaming in the low 20s which is
higher than the teens where the CBOE
volatility indicator resides during
periods of no market turmoil.

As market falls it would appear that
many investors have decided to take a
little profit while others are buying in
expectation of a rebound.

The question is if this is the start of a
long term slide, a more substantial
market correction, or just a bump in
the road to high stock prices.

Simply looking at the elevated VIX the
question is this.

When investments are volatile should
you sell or buy?

VIX as a Measure of
Volatility

What is the VIX and is it important to
your
investing? Investopedia explains VIX.

Created by the Chicago Board Options
Exchange (CBOE), the Volatility Index,
or VIX, is a real-time market index
that represents the market’s
expectation of 30-day forward-
looking volatility.

Derived from the price inputs of the
S&P 500 index options, it provides a
measure of market risk and investors’
sentiments.

It is also known by other names like
“Fear Gauge” or “Fear Index.”

Investors, research analysts and
portfolio managers look to VIX values
as a way to measure market risk, fear
and stress before they take investment
decisions.

When the market is going up or staying
the same, the VIX is low.

When the market is falling the VIX
goes up.

As an example, at the end of 2008 the
VIX went from a normal of 18 up to 81
over a couple of months as the market
crashed.

The calculation for the VIX is
complicated but what it is looking at is
puts versus calls as a guide to investor
concern.

The VIX is not the only indicator of
market volatility offered by the Chicago
Board Options Exchange. Others are
these.

Cboe ShortTerm Volatility Index
(VXSTSM):

• S&P 500 expected volatility next 9
days
• Cboe S&P 500 3-Month Volatility
Index (VXVSM)
• Cboe S&P 500 6-Month Volatility
Index (VXMTSM)

The usefulness of VIX and its relations
comes from its “canary in the coal
mine” property of predicting a falling
market based on the actions of option
traders.

But, let’s get back to our question.
When investments are volatile should
you sell or buy? And, is the VIX useful
in this regard?

VIX Last Six Months 2018 (Market Watch)

The Importance of
Recognizing Market
Volatility

The Motley Food writes about why
you should care about the VIX.

Some have dubbed the VIX the “Fear
Index” because of its tendency to rise
when the market drops and to decline
when the market rises.

Even though traders tend to interpret
high VIX levels as danger points, long-
term investors can use a high VIX
reading as a signal to look more
closely at stocks.

Once the VIX has risen, some stocks
might have had their share prices
beaten down already, and others
might have higher chances of falling to
attractive levels than usual.

Using the VIX as an early warning
system to start looking for bargain
opportunities has been a smart
strategy over time, especially in recent
years when long periods of low
volatility were the norm rather than
the exception.

We often suggest the use of intrinsic
stock value as an investment guide.

When a stock has been beaten down by
a fearful market its intrinsic value is
often the same as it was before the
market panicked.

Successful long term investors very
often buy into a decline in stock prices
in order to pick up bargains for the
long term.

They are not necessarily expecting the
entire market to recover all that soon
but the specific investments they buy
are those with long term value based
on fundamental analysis.

So, a high VIX indicating volatility is
not a direct indication to buy but it is
an indication that you should look
more closely at high intrinsic value
stocks that have taken a beating.

A reassessment of intrinsic value may
be in order.

And a laddered approach of buying in
increments is a good idea because
nobody can precisely time the market.

That having been said, when the
market has fallen and then VIX falls as
well, this is an indicator or stable or
rising stock prices.

Why Is the Stock Price
Doing What It Is Doing?

We are looking at a technical indicator,
the VIX, and suggesting that you use it
to carry out fundamental analysis.

Why do you need to use both tools?
Although markets tend to panic, they
often do so for good reasons.

The fundamentals, like a trade war,
can cause real damage to otherwise
healthy companies.

We wrote about how the trade war
damages investments in
agriculture.

When an elevated VIX tips you off to
look for high intrinsic value stocks,
make sure that the fundamentals that
are helping drive down the overall
market are not ones that will do lasting
damage to your chosen investment.

In the case of the trade war with China
US soybean growers are concerned
about the long term loss of a major
buyer.

Thus, when the VIX goes up and you go
hunting for bargains, make sure that
your assessments and calculations of
intrinsic value are based on current
information.

Three Stock Market Perspectives Through End of 2018

Can You Trade the VIX

Investopedia mentions in their VIX
article that VIX-linked securities can
be used to hedge risk and balance a
portfolio.

Active traders, large institutional
investors and hedge fund managers
use the VIX-linked securities for
portfolio diversification, as historical
data demonstrates a strong negative
correlation of volatility to the stock
market returns ,that is, when stock
returns go down, volatility rises and
vice versa.

This may be a more sophisticated
approach than many mom and pop
investors choose to follow but it does
indicate the use of this tool beyond its
“canary in the coal mine” value.

But, if an investor wishes to try this
approach it can be a stabilizing factor
in their portfolio.

When Investments Are Volatile Should You Sell or Buy?

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When Investments Are Volatile Should You Sell or Buy?