Low Volatility Can Be Dangerous
As market participants we often look for reasons of market behavior. Some are rational and explainable but others are not. Call it the ‘mystery of markets’. Frankly, it really is no mystery at all, it is simply about money flows in and out. Yet, our minds look for the most complex reasons for moves, as if we are trying to solve a difficult puzzle. The rise and fall in volatility is one of those conditions that continues to confuse market players.
There is an old saying, ‘When the VIX is high, it’s time to buy - when the VIX is low it’s time to go’. Simply put when fear is rising and peaking it is time to close your eyes and just buy. We have seen spikes in VIX become tremendous buying chances over the last several years.
Conversely, a low VIX implies complacency and lack of fear - a bold ego that says I have nothing to worry about, stocks are going up always. Often a bad move, because once the buying stops there is nothing left but sellers - then corrections ensue. Who can predict the timing of these events everytime? Answer is simple - nobody.
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