Monday’s free falling market finally brought us some indication of real fear in the market. The indicator that got many talking was the S&P 500 Index volatility index (VIX) being pushed higher than what we saw at the last financial crisis in 1998 (when a few PhD’s from Chicago almost took down the world economy with a little hedge fund called LTCM).
I wanted to take a closer look to see that spike in its proper context. So here is a long term chart of the VIX:
Yup, that was an unmistakable panic spike. Higher than what we have seen since going all the way back to the infamous crash of 1987! But to put the volatility into context, lets compare it to its own 50 day moving average:
This graph is a ratio of the volatility at any point in time, compared to its 50 day moving average and therefore, shows a more normalized version of volatility. Sometimes the market gets really quiet for a long time, making it easy to miss a rise in absolute volatility because it doesn’t register as high as previous, more “volatile” eras. Using this ratio, we know that today’s volatility is about 48 times “more volatile than normal” (measured over the last 50 days).
So this is emphatically saying that there is enough fear in the market to produce a lasting bottom in the market. But what about the volatility index for the Nasdaq market?
While the VXN has moved significantly higher in recent days it is still not high enough in absolute terms to match previous spike highs. Taking a look at the volatility normalized over the past 50 days:
Right now the VXN is 80 times as volatile as “normal” - which is high but not as high as we’ve seen this index climb.
If you’re feeling lucky, and have a cast iron stomach for risk, I would suggest it is ok to put some money to work here as long as you don’t use up all your firepower in one go. The market can certain drip or cascade lower. So be ready to not catch the perfect inflection point (as if that is even possible).
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