How to Spot Pivots in the VIX

It was a rare occurrence we hadn’t seen in 24 years.

The infamous fear gauge – the VIX – fell to an unusual low of less than 10 in May 2017 – something that hasn’t happened since December 1993.  In the single digits, the idea is that all is well.  Calm as resumed.  But it’s at these points when smart investors begin to worry.

They begin to get fearful as others become far too greedy, as Buffett will tell you.

That’s because historically, readings of less than 10 have only occurred in 0.2% of all trading days since 1990, according to CNN Money.   In fact, in each of the three times the VIX fell below 10, markets lost up to 6% of value months later.

After reaching a low of 9.31, the Dow Jones Industrials slipped from a high of 4,000 in early 1994 to less than 3,550.   After reaching a low of 9.64 in December 2006, the Dow Jones fell from 11,013 to 10,661.  Each was a rarity.  But when it happens, we need to be cautious in how and what we trade. 

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While the VIX will never be a crystal ball, it can be a warning sign that things may be getting a bit too calm. Another disturbing marker to note in May 2017 is how low Williams %R ran.  Historically, about 80% of the time, when W%R settles below its 80-line with the VIX, we’ve seen spikes in volatility shortly thereafter. 

Again, it’s not a crystal ball.  It’s just something to be well aware of. 

We can always flip things around too.

In fact, when the VIX begins to spike significantly, challenging its upper Bollinger Band with over-extensions on RSI, MACD and Williams, it ‘s historically served as a marker to begin buying stocks and markets again. 

In fact, if we go back just three years, we can see that each time that upper Bollinger Band is even touched, confirmed with our other indicators, we see reversal about 80% of the time.

What we’re simply tracking are excessive bouts of extreme fear and greed.

If you can do that, you can buy the blood in the streets, as Baron Rothschild has advised.  You can buy extreme pessimism as Templeton has noted.  And you can get fearful when others are greedy, and greedy when others are fearful.

All just by keeping a keen eye on what the VIX is telling you.  Sometimes, calm isn’t a good thing.  And sometimes, fear can be your best friend.