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Wednesday, May 10, 2017 9:45:03 AM
Conventional wisdom about the VIX ‘fear gauge’ is all wrong
By Mark Hulbert | May 10, 2017
It turns out that stocks don’t suffer if there’s low volatility
CHAPEL HILL, N.C. (MarketWatch) — You’re needlessly worrying if you’re concerned that the VIX’s recent low readings are a cause for concern.
That’s crucial, since the recent drop in the VIX VIX, +0.80% — known as the fear gauge — to multi-decade lows has led to endless hand wringing about the allegedly bearish omen it constitutes for investors. All I can figure is that analysts and commentators have watched too many Westerns in which the cowboy frets when his campsite is “quiet — too quiet.”
That’s because there is precious little data to support their concern. On the contrary: Since the VIX was created in 1993, the stock market has on average performed better following low VIX readings rather than high ones.
You read that right: Despite conventional wisdom to the contrary, low VIX readings are better news than high ones.
To be sure, as you can see in the accompanying chart, there is virtually no difference in the stock market’s average one-week, two-week and one-month returns following low and high VIX readings. But beginning with longer periods, and lasting up to as long as the subsequent year, the market historically has done better following low VIX readings.
Coupled with another pattern in the data, you can translate this insight into a profitable trading strategy. This other pattern was documented in a recent study that is forthcoming in the prestigious academic Journal of Finance by Alan Moreira and Tyler Muir. The professors found that not only does the market tend to better following lower VIX readings, periods of high volatility tend to be clustered together.
Taken together, these two historical tendencies mean that you can, with relative confidence, stay invested in equities so long as the VIX remains low. You would reduce your equity exposure only when the VIX heats up, staying out until it falls back again.
So the next time your adviser or analyst says low VIX readings are a cause for concern, ask him to produce the historical data that support his assertion. Better yet, send him the Journal of Finance paper and then start searching for a new adviser.
http://www.marketwatch.com/story/conventional-wisdom-about-the-vix-fear-gauge-is-all-wrong-2017-05-10
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By Mark Hulbert | May 10, 2017
It turns out that stocks don’t suffer if there’s low volatility
CHAPEL HILL, N.C. (MarketWatch) — You’re needlessly worrying if you’re concerned that the VIX’s recent low readings are a cause for concern.
That’s crucial, since the recent drop in the VIX VIX, +0.80% — known as the fear gauge — to multi-decade lows has led to endless hand wringing about the allegedly bearish omen it constitutes for investors. All I can figure is that analysts and commentators have watched too many Westerns in which the cowboy frets when his campsite is “quiet — too quiet.”
That’s because there is precious little data to support their concern. On the contrary: Since the VIX was created in 1993, the stock market has on average performed better following low VIX readings rather than high ones.
You read that right: Despite conventional wisdom to the contrary, low VIX readings are better news than high ones.
To be sure, as you can see in the accompanying chart, there is virtually no difference in the stock market’s average one-week, two-week and one-month returns following low and high VIX readings. But beginning with longer periods, and lasting up to as long as the subsequent year, the market historically has done better following low VIX readings.
Coupled with another pattern in the data, you can translate this insight into a profitable trading strategy. This other pattern was documented in a recent study that is forthcoming in the prestigious academic Journal of Finance by Alan Moreira and Tyler Muir. The professors found that not only does the market tend to better following lower VIX readings, periods of high volatility tend to be clustered together.
Taken together, these two historical tendencies mean that you can, with relative confidence, stay invested in equities so long as the VIX remains low. You would reduce your equity exposure only when the VIX heats up, staying out until it falls back again.
So the next time your adviser or analyst says low VIX readings are a cause for concern, ask him to produce the historical data that support his assertion. Better yet, send him the Journal of Finance paper and then start searching for a new adviser.
http://www.marketwatch.com/story/conventional-wisdom-about-the-vix-fear-gauge-is-all-wrong-2017-05-10
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Click on "In reply to", for Authors past commentaries
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