In today’s Exponential Investor

  • What to do next
  • Choose your own VIX
  • Take advantage of connecting

Should you BTFD?

Should you buy when there’s blood on the streets?

Should you run for the hills?

Should you buy stocks when it feels like everyone is clearing out like a bomb threat has just been called in?

Have you found yourself asking these questions at all over the last week?

I have.

It’s a series of questions that always sits in my mind. It’s a series of questions that should always sit in yours.

One of the hardest decision to make at any time in the market is to figure out when to take action.

When do you buy?

When do you sell?

When do you do nothing at all?

Hopefully I’ll be able to help out today with the answers to that.

VIX up, stocks down

Sometimes you’ll hear financial commentary talk about “the VIX”.

The VIX is up, the VIX is down, the VIX is running wild.

But what is the VIX? Well it stands for the volatility index. It’s a measure of how volatile the market expects the US S&P 500 to be.

What you find is that the VIX is a great measure of how the market (the US market) will behave. Take a look at the chart below.

Source: Koyfin

I’ve intentionally cut off the dates below this chart. It is a chart of the VIX.

As you can see, it regularly has a number of peaks and troughs. However, it’s pretty clear there’s an outlier on this chart.

What year do you think that outlier is from?

Let me show you another chart.

Source: Koyfin

This is the VIX again. We also see a pretty wild outlier there as well. These are two different charts looking very much the same.

I’ll ask the same question, what year do you think that outlier is from?

Let’s put your mind to rest.

The first chart is the VIX from March 2018 to today, March 2021.

The second one is the VIX from March 2005 to March 2010.

Those outliers are the two biggest spikes in the VIX since the CBOE launched real-time reporting of it back in 1993. The dotcom bubble didn’t even see the VIX rise as high and as hard as we saw in 2008 and 2020.

What we know is that when the VIX spikes up and hard like this, markets crash.

Considering this, can you anticipate the VIX’s movements and an imminent crash of the market? Can you time your investments to get out before the market crashes and then back in as it bounces back?

Can you use these kinds of measures to know exactly when to buy and when to sell?

Connection, not connecting

The VIX is an important measure because it directly related to the world’s largest stock market. That’s important as an investor in the UK for two reasons:

  1. You might be invested in the US market via direct stocks or via funds or exchange-traded funds (ETFs)
  2. The US has an indirect impact typically on other global markets – when the US market tanks, it’s rarely an isolated event.

Right now the US markets look like they’re tanking. Some of the world’s biggest companies have peeled off losses for the last month with regularity.

Is it a sign of more bloodshed to come? Also, this time a year ago the markets were doing pretty much the exact same thing. They were peeling off peaks from January and February to sink to a devastating market bottom around mid-March.

If we’re about to see the exact same thing, then we’re probably only halfway through what could be even more falls lower.

If the market, your investments, are heading lower, then what should you do?

Well the first thing would be to consider selling out of positions. But my take is that’s the wrong approach.

When you look at the movements of the market right now, it doesn’t correlate to a wild spike in the VIX. Sure, the VIX is at a level that’s higher than normal, but is there a forward expectation that we’re about to see 2008 or 2020 levels of action?

I don’t believe so.

In fact, I think the best thing to do right now is to be building positions in your portfolio.

What’s driving global markets and sentiment right now isn’t actually the VIX. It’s not WallStreetBets, it’s not crypto, bitcoin, the Federal Reserve or central banks printing money.

It’s simply that people have realised there’s a whole bunch of stocks that have been bid up to ridiculous prices and that’s simply not sustainable.

What’s driving the “market” lower right now is all the heat coming out of all the stocks that rampantly boomed in 2020 after the March lows.

I call them the “Zoom Stocks” – the stocks that “zoomed” higher because people thought that the conditions we’ve faced over the last year will be a “new normal”.

No. This isn’t a new normal. This is an anomaly. A year-long anomaly, perhaps a year-and-a-half-long anomaly. But an anomaly, nonetheless.

Our “new normal” will very much look like our “old normal”. That means the “Zoom Stocks” are probably going to continue their trend lower. Investors will realise that we’re not all going to incessantly video conference at home, exercise on the Peloton or exist solely inside our apps.

Human nature means we require, desire, need human contact and interaction. Technology helps us to connect, but it doesn’t replace connection.

Therein lies opportunity. Therein lies what you should do even if the markets are in the midst of a mini-repeat of March 2020.

My view is the stocks you’ll want to avoid most right now are the “Zoom Stocks” that boomed to unsustainable highs last year.

The stocks you’ll want to embrace are all the stocks that include and enhance real-world human interaction and connection. Those stocks are the ones that will surge in 2021, those are the positions you should be looking at.

And in tomorrow’s Exponential Investor, we’ll take a hard look at three of them that could be the best successes of 2021.

Regards,

Sam Volkering
Editor, Exponential Investor