[color-box color=”red”] The crowd always panics when the markets are pulling back, never when they are running up. Why is it that they wait for the markets to pull back strongly before jumping into the den of panic and misery?[/color-box]
Like clockwork the reaction is always the same; there is never any variation and the top players use this to their advantage. Take a look at any so-called market crash or financial disaster and you will see that the markets recovered from each and every one and recouped all the losses and then some in the process.
Let’s look at one of the most commonly followed measure of fear in the market; the VIX.
VIX has been trending upwards, but it has not spiked up yet; there is a possibility it could follow the path we have outlined in the red line (look at the second chart). However, even if it does surge upwards, it will trend down towards the new norm, which falls in the 12-18 ranges. While it is hard to think straight when panic is in the air, this is precisely when you should force yourself not to react and give into panic. When fear governs a person’s actions, the outcome is nearly always unpleasant. [color-box color=”blue”]When market volatility run high as is the case right now, it is best to tighten one’s stop.[/color-box] Yes, it’s not the best feeling to be stopped out, but it is far easier to recoup from small losses than from major ones. Another way to look at it is that if you are stopped out and you liked the stock, you now have the chance to buy the stock at even better price.
Take a look at a five-year chart of the VIX. What stands out immediately is that every Spike upwards was short lived, and shortly after the spike up, the VIX has traded in the low ranges for an extended period.
For the past five years, the VIX has traded in 12.5-20.00 ranges; the upper range is 2 points wider than the one year chart. This picture clearly illustrates that giving into panic does not pay. You have a clear pictorial representation illustrating exactly when the Crowd gives into panic. A spike up is associated with a strong pullback and vice versa. Note how much time the VIX spends in the low ranges. Low VIX readings correspond to higher market prices and vice versa.
In this chart, we have laid out the probable path we think the VIX is likely to take. Even it does spike upwards, instead of panicking we would view this as a positive development. History indicates that after a spiking upwards the VIX always pulls back and spends more time in the lower ranges. Lower reading usually correlates to higher market prices and spikes usually correlate to market bottoming action.[color-box color=”blue”]Our volatility indicator is now trading in record territory; a clear confirmation that 2016 is going to be the most volatile year on record. As a result, the VIX will experience extreme moves to the upside and downside more often. The moves to the downside will be longer in duration as the trend based on our trend indicator is still positive.[/color-box]
Which one would you rather play; a correction that begins and ends suddenly giving you little time to react, or a nice upward move, that lasts four times as long and gives you ample time to jump in and or out. We are not making this up.[color-box color=”red”]Volatility is a two sided equation, and we believe the moves to the upside will be even larger than the moves to the downside. Use the time wisely now to build up a list of stocks you always wanted to own but could not get into because the price were too high.[/color-box]
Other articles of interest: