A Historic VIX Spike

Chaos and Opportunity

Chima

Aug 05, 2024

Blood in the streets…

The BLS reported a disappointing July jobs report.

Wall Street is thirsty for a Fed rate cut.

Yen carry trades are unwinding.

Warren Buffet sold a bunch of Apple stock.

Japanese stocks suffered their worst crash since 1987.

The VIX spiked above 65.

In short, markets are panicking.

It’s reasonable to feel anxious about all of this, but panic is never a good investing strategy.

IMO, it’s times like these that are most fun to be a market participant. Huge volatility spikes to both the up and downside.

In no particular order, we can probably expect to see the following over the coming days:

CNBC runs its infamous Markets in Turmoil special
Stories about overleveraged hedge funds and traders blowing up
Headlines will get worse all in the name of driving clicks and stoking fear

Highest VIX since the COVID panic

The VIX represents the market's expectations for volatility over the coming 30 days and is often referred to as the "fear gauge" or "fear index."

This morning, the VIX spiked above 65, then promptly began rolling over.

Some perspective: this was the third-highest VIX spike ever, behind only the ‘07-08 financial crisis and COVID-19. The VIX rose as high as 85.47 in March 2020, according to FactSet.

Howard Lindzon (highly recommend subscribing to his newsletter) had a prescient note over the weekend.

I like to say if you are going to panic, panic first. To panic first you need to be raising some cash when the $VIX is 12. You panic a bit when leading indexes are 20-30 percent above their long-term moving averages. It is hard to do this because because stocks are going up and breakouts are a plenty.
With respect to fear…
Fear flashes and fades quicker.
We are in that flash phase right now and hopefully it fades relatively quickly. Nobody knows for sure.
I have seen these enough to focus on doing the opposite. Firemen run into a burning building. The few times a year when the $VIX flashes I am trying to be that fireman. I am looking to deploy cash when the $VIX is spiking over 20.
I do not know if this correction is the beginning of something bigger or another great opportunity to buy the dip. I am spending a lot of time this weekend weighing some bets and thinking about when and where to deploy some capital.

Fun fact of the day: 87% of the time, investors who bought the S&P 500 on days when the VIX closed at 30 or higher ended up making money a year later.