When VIX index shows the volatility is predictable
Let's go back a decade and observe how the VIX index played out the 2007-2008 financial crisis and the market's recovery.
Previous to July 2007, the highest VIX value was $22.58 observed in June 2006 (minuscule compared to what comes next).
Then the crisis happened, and VIX became extremely volatile and created a new support level at $16.7. There is various observation here that should be treated as lessons from the past.
1. The market does not magically become stable. It takes time to stabilize the market, attract long term investors and build faith in the success of businesses again. On 29/Dec/2008 week, the VIX went from $47 to $30 which was a $17 drop. It was immediately realized that the market is not ready for a quick recovery and the price increased back sharply to the $57 level ($27 increase). However, the steady, slow drop is not rejected as sharp as previous. A slow price decrease from Mar 2009 to April 2010 (over a year) rejected sharply only at the previous support level.
2. When the support level is shifted or levelled up, it takes time to recover the support level. The VIX went through multiple rejections during a span of 6.6 years to recover the support level. It takes a really long time to bring the support back to the old (stable) level after a market crash.
3. Every time VIX hits the support, you get a golden opportunity to play long VIX with little to no risk. Every time the market hits the support, it goes up again. With a higher margin and tight stop loss, you could have made large profits using VIX.
4. Finally, the quiet period comes after 2013. Stocks are good, the market is predictable and VIX volatility is low.
5. In 2020, we see another market crash, VIX increase to $80.8. This is even higher than the highest of 2007-2008 which was $69.4. At the moment of this analysis, VIX just tested $19.8 and currently selling at $20.08. Mind that the market crash wash only a year ago.
I am not going to do the analysis on the 2020-2021 window but here are some questions for you.
1. Has the market recovered too soon? For the past year, VIX established the $21 as its new support level. Can the current bull run of US stocks make sure VIX support at $21 can be broken? Or are we at the edge of an explosive VIX movement?
2. With COVID still affecting the lives, can VIX go back to the good old $12.4 support level?
I would say no. There is no chance VIX going past $15 and I sincerely doubt it will go past $18. You have a golden opportunity to buy VIX at an extremely bargain price. Both the risk/reward and probability are in favour of you.
Forget Crypto, forget any hot stocks, forget gold. I can't advise you to buy VIX now but I strongly suggest that you should do your own research and consider adding the VIX index to your portfolio.
Previous to July 2007, the highest VIX value was $22.58 observed in June 2006 (minuscule compared to what comes next).
Then the crisis happened, and VIX became extremely volatile and created a new support level at $16.7. There is various observation here that should be treated as lessons from the past.
1. The market does not magically become stable. It takes time to stabilize the market, attract long term investors and build faith in the success of businesses again. On 29/Dec/2008 week, the VIX went from $47 to $30 which was a $17 drop. It was immediately realized that the market is not ready for a quick recovery and the price increased back sharply to the $57 level ($27 increase). However, the steady, slow drop is not rejected as sharp as previous. A slow price decrease from Mar 2009 to April 2010 (over a year) rejected sharply only at the previous support level.
2. When the support level is shifted or levelled up, it takes time to recover the support level. The VIX went through multiple rejections during a span of 6.6 years to recover the support level. It takes a really long time to bring the support back to the old (stable) level after a market crash.
3. Every time VIX hits the support, you get a golden opportunity to play long VIX with little to no risk. Every time the market hits the support, it goes up again. With a higher margin and tight stop loss, you could have made large profits using VIX.
4. Finally, the quiet period comes after 2013. Stocks are good, the market is predictable and VIX volatility is low.
5. In 2020, we see another market crash, VIX increase to $80.8. This is even higher than the highest of 2007-2008 which was $69.4. At the moment of this analysis, VIX just tested $19.8 and currently selling at $20.08. Mind that the market crash wash only a year ago.
I am not going to do the analysis on the 2020-2021 window but here are some questions for you.
1. Has the market recovered too soon? For the past year, VIX established the $21 as its new support level. Can the current bull run of US stocks make sure VIX support at $21 can be broken? Or are we at the edge of an explosive VIX movement?
2. With COVID still affecting the lives, can VIX go back to the good old $12.4 support level?
I would say no. There is no chance VIX going past $15 and I sincerely doubt it will go past $18. You have a golden opportunity to buy VIX at an extremely bargain price. Both the risk/reward and probability are in favour of you.
Forget Crypto, forget any hot stocks, forget gold. I can't advise you to buy VIX now but I strongly suggest that you should do your own research and consider adding the VIX index to your portfolio.