Talking Numbers

Fear not. The VIX is flashing a buy sign

Fear not. The VIX is flashing a buy sign

It's been the investment equivalent of Pavlov's dog. The VIX spikes, and soon after, a rally in stocks quickly ensues.

In fact in the past year, the VIX, or so-called "fear index" has moved 50 percent or more off its lows four times, and each time the S&P has made meaningful moves higher.

So as the VIX now flirts with four-month highs, investors are asking a very simple question: Is all this volatility a buying opportunity, or will things be different this time?

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According to one well-regarded technician, the VIX is flashing a big "buy" sign.

"Spikes in the VIX tend to indicate heightened investor fear," said Ari Wald, head of technical analysis at Oppenheimer. "From a contrarian standpoint we use that as 'buy' signals, and the numbers agree." According to Wald, since 1990, when the VIX spikes more than 50 percent off its 63-day low, and the S&P 500 is above its 200-day moving average, as it is now, the S&P 500's performance has been more than "twice its average performance over the next one and two quarters."

In other words, despite all the fear and anxiety, the market is flashing a rare "buy" sign. "We had that last Friday, that criteria was met. We see it as a 'buy' signal," Wald added.

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But it gets even better for the bulls. That's because in the few instances that this phenomenon has happened since 1990 (S&P 500 above its 200-day moving average, VIX spikes of 50 percent or more), the forward average performance of the S&P 500 13 weeks, 26 weeks and 52 weeks out has been a respective 4.6 percent, 9.1 percent and 13 percent, according to Wald's research.

But with anything, past is prologue, and despite history, some market participants are buying simply off the VIX.

"Look, it's a measure of volatility," said David Seaburg, head of listed trading at Cowen & Co. "It's not a measure of the direction."

According to Seaburg, the VIX will continue to be elevated, but it may not necessary be signaling a buy sign.

"Last year people sat on their hands and they basically didn't have to use their brains at all and they made money in this tape," he said.

To Seaburg, there is a much simpler reason to get long stocks: improving fundamentals.

"I think the market is going to continue to grind higher on more volatility and the VIX will continue to grind up a little bit here as well."

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