^Vix Indicator of S&P Market Fear

16 Feb

Over recent years, when the Volatility Index (^VIX) hits a range of 15 to 18, it seems that the market sells (S&P 500).

The strategy is to be data orientated and unemotional. Based on market and index charts, the expectation is for a market sell-off. This may be minor or extreme but only time will tell. My approach is to keep 50% fully invested in defensive equities focused on strong cashflows and business models; while taking an alternate approach with the remaining funds. These funds have purchased assets with varying degrees of negative correlation to help protect the portfolio from volatility. The strategy being to structure the portfolio with assets that are expected to produce positive returns in most market conditions over a specified time period. So, the investment horizon is over the medium to longer term but with the plan to try to produce positive returns each and every year.

 

VOLATILITY S&P 500 (^VIX)

-Chicago Options     19.04      13 Feb 21:14
Chart forVOLATILITY S&P 500 (^VIX)

If the markets race higher than expected, we are prudent and take action to reduce market exposure. When there is a higher chance of loss than gain. If the opposite happens and we see a major market correction, depending on the driving forces this may lead to a buying opportunity.

By taking this approach we are able to buy some of the assets potentially at a cheaper price; while if the converse happens we are holding sufficient defensives to soften any significant declines. It is fair to accept that the strategy is generally defence with strong prudent overtones.

What we strive to achieve are positive return in all market conditions and over time this strategy has been successful.

My current thoughts on the markets for 2012 can be summed up in a single word, “volatile”. If sentiment remains positive  (as current) then the year will see growth. Although, I believe it is equally plausible for the market sentiment to turn negative very quickly. There are many negatives that could cause a significant decline, if issues work out worse than hoped plus many unexpected scenarios are very possible.

It is unrealistic to make a forecast stating only one likely outcome especially with such contrived and vulnerable data. The variables are diverse and potentially dire or possibly, better than we hoped. Only time will tell which way the market will trend.

Something else to consider, on many previous index declines into 15-18 pricing range, the VIX produced a market sell-off leading to a market bounce. The market typically doesn’t reach its top from anywhere between three weeks and three months later. History creates general flows and trends but don’t expect it to repeat in the form or shape.

It is fair to say, I’m focused on the point that the 15-18 VIX area produces a market selloff – especially with 20th March looming and the Eurozone Debt Crisis expected to become a major focus, yet again. In addition there are escalating issues in the MIddle East, Asia and many others.

Good luck with your planning. Remember – plan, review and plan again.

This is an exciting time for the markets, both good and bad opportunitiies loom in the future.

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