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Investors’ Fear Is Spiking

Fear is spiking in global markets as investors swig heavily on sovereign debt soda. The VIX fear gauge has shot up from 15 to 25 since late April. The S&P/ASX 200 VIX has been rising even longer, since late 2010. On August 1 it was at a moderately fearful reading of 21.68.

Fear is building.

Bring it on!! Buying on fear gives me the bargains I crave. It’s time to review all your top stocks and watchlists, and tune in to the market.

Source: Capital IQ, a division of Standard & Poors: The Motley Fool Australia.

I choose not to concern myself with the economy, preferring to spend my time researching companies. I am content that fear and greed will create opportunities to buy at a discount and sell at a premium. The VIX confirms when markets are fearful and greedy, so there is little need to tune in to the daily noise of the economy.

Opportunities are starting to appear.

I have the smell of good earnings in my nostrils and the proverbial can looks like can cope with a few more kicks down the road. What’s amazing about the current upswing in the VIX is it coming when 81% of US companies are beating estimates.

With increasing earnings, plus a fearful market sell-off, we have the ingredients for a year-end rally. While I don’t forecast, I am alert to opportunities and love a sale!

VIX chart during GFC and Sovereign Debt Crisis Source: Capital IQ, a division of Standard & Poors: The Motley Fool Australia.

The S&P/ASX 200 VIX (ASX code: XVI) chart follows a similar pattern to the VIX since 2008.

ASX200 VIX chart - Fear Gauge Source: ASX Website

Need to Know

The VIX is the CBOE Volatility Index, it was introduced in 1993. The VIX is commonly referred to as the fear gauge as it measures market expectation of near term volatility conveyed by stock index option prices.

What the?

Think of it like this. When people are fearful of a stock market correction they buy insurance. The insurance they buy is the right to sell the stock index at a set price, they do that by buying Puts. Conversely if investors are expecting a rally they buy Calls – the right to buy the index at a set price. The VIX measures how many puts and how many calls are being traded. When more puts are bought the VIX rises.

Dean Morel does not have a position in the VIX, but he sure does get excited when fear is pervasive. The Motley Fool has a living and breathing disclosure policy.

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