Waiting for the rebound of the Volatility Index

Better known as the fear index, this indicator will tell you which is the right momentum to buy and sell stocks. If you are a long-term investor in the equity market then you can use the index to better hedge your portfolio from the volatility of any possible market correction. The CBOE Volatility index has a perfect negative correlation with some of the most important indexes of the US stock markets like the S&P 500 and the Dow Jones Industrial.

The VIX index is not scaring the investors from some considerable time. It hasn’t broken the levels that many investors consider as a message to monetize the investments. Actually the index has reached the lowest level historically, around 12.3 points. To have an idea of how low it is, compare that to the record values of around 50 that the index reached in years 2010 or 2011.

What can now, push this volatility index higher, just like it happened in 2008? That time was a strong Credit Event, the failure of one of the “too big to fail” banks of Wall Street. Could it be Greece this time? Not for sure. The last meeting of the Fed Commit has dismissed again the rate hike. So the party may go on, a little longer.

But the fundamental analysis gives us some evidences that the market is overvalued, as price/earnings are very much above the average. The technical analysis remind us, that summer is not a good season for the equity markets, and the oscillators need a slowdown. Most likely, this summer we can expect a 10% correction, the percentage we still haven’t seen from years. Lastly, the market takes for granted a rate hike by the Fed up to November and in any case before the end of the year. Many traders will try to take advantage from this action and will sell the stock indexes before this long-awaited event will materialize.

The Volatility index always makes the first move and reflects investors’ fear for a correction. So, we expect this index to leave, within July, these very low levels before it breaks the 20-25 levels. It will not be a Credit Event to drive the volatility index higher but a technical need for a correction in some emerging and development markets around the world.

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