Unusual Movement of the Volatility Index – And What It Means for YouTrevor Gerszt
Something unusual is happening in the investment world.
The Chicago Board Options Exchange Volatility Index (CBOE VIX) usually moves opposite to the stock market. When stocks are up, the VIX is down, and vice versa.
But lately, even though the S&P 500 is on the rise, the VIX is climbing as well. Many experts believe it indicates a major selloff on the horizon, and possibly other dangers to follow. Let’s take a closer look at exactly what the Volatility Index is and what its movement means for you.
What Is the VIX?
The VIX is often known as the fear index. It’s a measurement of expected volatility in the S&P 500 over the next 30 days. Rather than measure different stock prices individually, it averages a few of them together, looking at their current movement and how they’re expected to move in the foreseeable future. It takes the amount by which the S&P is expected to vary over the next 30 days, takes the square root of that number, and multiplies it by 100 to get the VIX index number. By doing this, it can estimate whether stocks are likely to rise or fall going forward.
Since the movement of the Volatility Index is based on the movement of certain stocks, you can usually trace a major surge to some specific catalyst. For instance, in June of last year, there was a huge selloff of equities, which caused the VIX to jump 23% in a single day. But what does it mean when VIX and S&P are rising together?
A Selloff Looming
The S&P 500, much like the Dow, has been on the rise, particularly the last month or so. It rose 3.5% in February, hitting a record high of 2,351. In just this first week of March, it saw another spike and even more record highs. Meanwhile, the CBOE VIX has been going up as well, at almost exactly the same rate.
What this shows is that, even though stocks are rising, people are worried that it won’t last. For one thing, Federal Reserve Chair Janet Yellen has said that March would likely bring another interest rate hike, which generally leads to an immediate fall in stock prices. Furthermore, investors are worried that these record highs in both the Dow and S&P are merely a bubble, and that it’s on the verge of bursting.
What all of this comes to is the likelihood of a selloff sometime in the near future. Stocks will go down, but fear will continue to go up, leading to investor panic and a major decline. So what can be done to prepare for this selloff and its aftermath?
The VIX and Gold
Gold is the asset people turn to when they fear stock market volatility. It not only maintains its value over time, it tends to go up when stocks go down. Therefore, a rise in the fear index nearly always correlates to a rise in gold as well. Since 2001, a spike in the VIX has led to a spike in gold 6 months later, almost every time, by anywhere from 1% to 22% (though the average rise has been about 9.1%).
Indeed, gold has gone up nearly 6% this year so far, and is likely to rise even higher in the coming months. Therefore, now is the smart time to get into gold, while stock volatility looms, but hasn’t yet come to fruition. When the markets do fall, gold will go up in response, providing you with a cushion to fall back on, safeguarding your nest egg and preventing you from losing everything.
Another option is to invest in the VIX itself. While you can’t buy shares of it directly, you can buy futures contracts in it. In theory, this means that as S&P volatility rises and stocks go down, your VIX investment will rise. However, in practice, VIX futures often end up being more expensive than the actual VIX index, causing you to lose money in the long run. The correlation between the VIX and gold is actually more reliable, making it the safer investment.
On the surface, the markets seem to be doing well. As the Dow and S&P both continue to break their own records, it can lull investors into a false sense of security. But remember that this bubble can’t last forever, and the story the VIX tells shows that it’s likely already on the verge of bursting. Don’t wait around and be caught in the wake of another financial disaster. Protect yourself now, ahead of the curve, so that when the market corrects itself, you’ll be ready.
That’s why having a gold IRA is so crucial. As a safe haven asset, gold gives you something to fall back on when the markets go down. Plus, it tends to go up when other markets decline. So when your stocks lose their value, your gold investment picks up the slack and prevents you from suffering what would otherwise be a devastating loss.