Use this ‘golden toggle' to determine when to buy in this choppy market, Leuthold says

Published Tue, Apr 19 20222:03 PM EDT

One measure of investor sentiment could be used as a "golden toggle" to know when to buy stocks on dips during this bull market, says Leuthold Chief Investment Strategist James Paulsen. Investors should start buying stocks when the so-called VIX Index level goes above 20, according to Leuthold. Often referred to as the "fear gauge," the Chicago Board Options Exchange's CBOE Volatility Index (VIX) is a measure of volatility that climbs over 20 when investors anticipate greater risk, which is priced into the options market. "Some of the worst stock market declines occurred as the VIX rose," Paulsen wrote in a Thursday note. "But, in true contrarian fashion, some of the historically best buying opportunities were at major peaks in the VIX Index." The VIX was last at about the 21 level and has been above 20 for most of April. To be sure, the VIX 20 level loses its effectiveness when stocks are headed for bear market territory. However, if this current period is just a pullback in a bull market, Leuthold believes that both short- and long-term investors can use the toggle as a measure to inform investment buying decisions. "Nobody ever knows for sure which direction it will move, or if it is nearing a significant top," Paulsen wrote. "Nonetheless, at least since 1990, a VIX of 20 during a bull market has proven to be an important level for stock market timing, and in the contemporary bull market, '20' has become a 'Golden Toggle Switch!'" The investor pointed to the historical performance following the VIX 20 level in the last four bull markets. During the 1990s, the early 2000s, the 2009 to February 2020 period, and the current bull market starting March 2020, the one-week forward return of the S & P 500 when the VIX level was above 20 was 0.36%, compared to the 0.15% one-week forward return when the VIX was below 20, the note said. The trigger is "particularly powerful" as volatility spikes in the current market. In March, the VIX Index topped a level of 36 as Wall Street dealt with heightened uncertainty around the war in Ukraine, as well as well as spiking commodities prices. In December 2021, the VIX Index topped 31. Investors can use those volatility spikes to their advantage. Almost all gains in the first 107 weeks in the contemporary bull market were achieved when the VIX level was higher than 20, the note said. For investors who take the opportunity to buy, the one-week forward total return for a VIX level above 20 was 1.04% in the current bull market, according to Leuthold. To be clear, these returns are not an indication investors should day trade the market, Paulsen points out, but rather they prove this is a helpful contrarian signal for when to add to or buy positions.

Traders on the floor of the NYSE, April 14, 2022.

Source: NYSE

One measure of investor sentiment could be used as a "golden toggle" to know when to buy stocks on dips during this bull market, says Leuthold Chief Investment Strategist James Paulsen.