How Do I Invest Right Now

7
Oct
2011
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     After reviewing a chart of the CBOE Volatility Index (VIX) this morning, I noticed that we recently hit an important pivot point with regard to fear in the markets.  August 9th, 2011 saw the index hit an intraday high of 47.56, while at the same time the S&P 500 index hit a year to date low, intraday of 1101.17.  Tuesday, this week, the VIX touched 46.88 before heading lower at this writing.  If we had hit a new high in the VIX this week, this event would have signaled to the markets that stocks can make a leg down to lower support levels around 1020.  http://finance.yahoo.com/q/bc?s=IVV&t=6m&l=on&z=l&q=l&c=

     Although I do not primarily use technical analysis when evaluating individual investments, I do understand the overall stock market these days seems to be led exclusively by such analysis.   

 

Snapshot of CBOE VIX chart from April 1, 2011 to Oct 7, 2011

     The chart above shows a pick up in volatility beginning in late July, followed by a spike up that climaxed on August 9th, 2011.  Now, some of you who have been investing in the capital markets for some time have probably heard some of the old adages, “Buy when there is blood in the streets”, “Buy the farm when there is a drought” (made famous by Buffet), and “Buy on the rumor and sell on the news”.  All of these adages have been proven to be trustworthy to investors when followed and executed with a long-term perspective.  However, most main street investors do not really have the stomach to buy when the VIX hits a high and then, the prudence to lighten up on stocks when the VIX is at 52 week lows. If you were to ask, ‘“how do I invest my cash right now”?  My answer would be to begin buying high quality stocks, with any capital that has an investment time horizon of 5 years or more.

     Today’s job numbers coming in slightly better than expected, could be enough to send the VIX down below the 50 day moving average line where it is sitting now.  A break below the average, would signal a significant rally in stocks in the near term; However, in my opinion, there will need to be a bigger catalyst than a mediocre jobs number to lower the fear in the market to a significant level.  I believe that a large move forward in alleviating the perceived crisis in Europe is what will push the VIX below the moving average and send it back down into the high teens sometime in the next six to nine months.  A move like this could put the S&P 500 at 1250 to 1350, which is where many strategist have set as their year end targets.

     In the meantime, I will continue to monitor the “fear factor” in the market, along with your investment portfolios.