The CBOE Volatility Index or “VIX” is the most widely followed barometer of expected near-term stock market volatility. Known as Wall Street’s fear gauge, the index measures investor expectations that stocks will experience sharp moves, either up or down, in the future. 

Generally, a sharply rising VIX coincides with lower stock prices. As the VIX climbs, the market declines. The VIX index had been in a tight range, some might even say suppressed, since the Election until about April of this year, when it kicked up a bit. 

The combination of a tranquil environment for stocks and an absence of any potentially major market disrupting events led to the VIX to an all-time low, just days ago, lulling most investors into thinking the market was free from uncertainty. Some wondered whether volatility would ever rise again. However, market conditions can sometimes change quickly. 

On August 10th, the VIX spiked on geopolitical tensions involving North Korea. It rose from 11.1 to 16.2, a +45.5% increase and the 8th largest one-day move in its history. The stock market declined by -1.43%. A rising VIX and the approaching seasonally weak months of September and October may yet produce even more market angst for investors.

It’s not all bad news, though.

When the market experiences a period of higher volatility, it often creates price disparities that savvy investors can take advantage of, because when volatility is rising, the crowd is panicked. And a panicked crowd makes poor investment decisions. Fear causes panic, which often results in liquidation, sometimes at ridiculously low prices. Remember, the crowd is always wrong – always.

So, if you’re not fully invested and/or sitting on a pile of cash, think seriously about investing some of it over the next several weeks. Put your shopping list together now and be ready to buy your favorite stocks, ETFs and closed-end funds (CEFs) should the VIX continue its climb. 

Generally, a good rule for investors to follow is to “buy” into a volatility spike, never “sell” into one. Securities almost always become mispriced as the VIX spikes. It’s an advantage for buyers and disadvantage for sellers. 

The bottom line – greater volatility usually means greater opportunities for investors.
 

George Kiraly Jr., CFP®, MBA is a NAPFA-Registered Financial Advisor.

Disclosure: George Kiraly Jr., CFP®, MBA is the Founder & Chief Investment Officer of LodeStar Advisory Group, LLC, an independent Registered Investment Adviser located in Short Hills, New Jersey. George Kiraly, LodeStar Advisory Group, and/or its clients may hold positions in the ETFs, mutual funds and/or any investment asset mentioned above. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The above commentary does not constitute individual investment advice. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

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