Volatility Index Could be Flashing a Buy Signal

Investors have been fed nothing but copious amounts of volatility in the past few weeks. Nonetheless, all the market fluctuations could be signaling an opportunity to buy for investors who want to go bargain hunting.

The signal is emanating from the standard volatility index or VIX.

“Last week the VIX spiked into the 40s in a declining market,” a Forbes report by Simon Moore noted. “That’s unusual. For much of last year, the VIX traded below 15, and sustained spikes over 30 have historically been rare, occurring about annually in recent years, if at all. The VIX is often referred to as the market’s fear gauge. Technically, that’s not strictly true. What it actually measures is implied volatility on a basket of near-term S&P 500 stock options. Still, the effect is similar when there is a high degree of uncertainty in the market, which is often reflected in elevated option prices. This then shows up as elevated implied volatility. Basically, at times of market stress, people want to pay up for the insurance that options can provide. The recent rapid decline in markets and associated global events are clearly a source of stress for many market participants.”

In essence, it can present a prime opportunity to dive into equities.

“Researchers have found that times of elevated fear can present buying opportunities,” the report added. “This is something traders have often known intuitively. The VIX is a reasonable proxy for fear in the markets. Researchers Alessandro Cipollini and Antonio Manzini have dug into the relationship over a decade ago, and it appears, broadly, to have held up since.”

VIX Chart

VIX data by YCharts

Trading the Winds of Change in the S&P 500

As the markets continue to flux with the uncertainty of the coronavirus, investors can utilize trading options for the S&P 500 that go in either direction, depending on your own confirmation bias. For bullishness, there’s the Direxion Daily S&P 500® Bull 3X Shares ETF (NYSEArca: SPXL)

SPXL daily investment results equating to 300% of the daily performance of the S&P 500® Index. The fund, under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the index, ETFs) that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index.

The coronavirus could continue to put a bearish spin on major indexes like the S&P 500. As such, traders can look to the Direxion Daily S&P 500 Bear 3X ETF (NYSEArca: SPXS) for a leveraged inverse play.

SPXS seeks daily investment results equal to 300 percent of the inverse of the daily performance of the S&P 500 Index. The fund, under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the index equal to at least 80 percent of the fund’s net assets (plus borrowing for investment purposes).

For more market trends, visit ETFTrends.com.