It was a tough week for investors as fears from the ongoing oil price meltdown have pushed beyond just the energy sector and into broader market. Corrections are a normal part of every bull market and should be looked as opportunities to deploy un-invested capital. Of course the $64,000 question for investors looking to do so is when will the bottom of this correction be in?
During this multi-year bull market I have found something that works very well. In the bottom pane of the chart below is a plot of VIX (blue lines) with Bollinger bands (gold) overlaid on top. The upper pane is a plot of the SP500 stock market index. For those not familiar the VIX is commonly referred to as the “fear index” by the financial news talking heads. But that is a misnomer as there are times based on the price of this index that it construes fear, but other times it reflects complacency. Without spending more time on the VIX as I will leave that to the reader, in very simple and general terms, it tends to rise when the market falls and falls when the market rises. You can see that in the chart below. Peaks in the VIX tend to mark bottoms in the market and vice versa. What you can also see is that every time that 1) the VIX closes above 17 and 2) outside the Bollinger band and then back in, it has been excellent at identifying those times to “buy-the-dip”.
Looking ahead to next week – Since the VIX is still outside the Bollinger bands and has NOT moved back inside, we have yet to see the bottom and as such “dip” buyers should continue to be patient and wait for confirmation.