Volatility surged this week as uncertainty over a potential Brexit had investors hitting the panic button, but according to one trader, investors would be wise to buy stocks in this type of environment.
The CBOE Volatility Index, commonly referred to as the VIX, hit its highest level since February this week — spiking above 20 after months of little to no activity. But as Khouw noted, in the past when the index rises above that level, it's proved to be a tremendous buying opportunity for stocks.
Looking at how the S&P 500 has performed at times when the VIX was above 20 versus below it over the past three years, Khouw noted that the average return for equities is actually better if you bought when volatility was heightened.
"You'll observe that when the VIX was above 20, if you had bought the S&P over the next 30 days you would have averaged a return of 3.1 percent, your best return over that period would have been 10.9 percent and your worst would have been down about 8 percent," said the co-founder and president of Optimize Advisors. "Here's the interesting bit, you would have been profitable 80 percent of the time."
Compare that to buying the large-cap index when the VIX is below 20, and returns are much lower. Khouw noted that if one were to purchase the S&P 500 in a period of low volatility, or when the VIX is below 20, the average return is around half of a percent, while the best return is 8.2 percent, the worst is negative 9.7 percent and the index is only positive 64 percent of the time in the 30 days following.
Khouw attributed the disconnect to investor fears when so-called bad news creeps into the market — and advised traders to pay close attention to the fear gauge and the markets next week. "After Brexit if we do see a dip, I think you buy it," he said.