Fear Is Here: Instability in Market Expectations

As the Fear Factor (VIX) rises, stock indexes remain flat. This is an alarming sign. It suggests uncertainty about what’s ahead for the market.

Image Credit: Yahoo Finance 11/1/2016

The VIX is an important assessment of near-term instability market expectations. As such, it is called the market fear factor (indicated in blue above). Over the last month, the fear factor significantly increased as the major indexes lagged. For example, the DJI, the Dow Jones Industrial Average (indicated in green above) has, at best, remained stable.

As the Fear Factor (VIX) rises, stock indexes remain flat. This is an alarming sign. It suggests uncertainty about what’s ahead for the market. Whether this scenario is due to the impending election or not, it could mean danger ahead. Investors who follow the stocks daily wonder what to do.

In a previous column, I addressed one way to consider investing during economic instability. Any suggestions made in it need to analyzed again for relevance to the current market.

Of course, there are other ways to handle volatility as well. For those who are older or without a job that provides continuing secure income, paying off a loan might be of benefit. For others, considering how much fear is too much and thereby how to manage is another.

For those who identify themselves as a scaredy-cat (please see “Overdue for a Bear Market Tumble”), here are some further common sense approaches:

1. Consider hiring a manager who may be more clear-headed about the market and help through a downturn. Ask this person to figure out if you will have a stable income if the market remains depressed for three or four years and if not, how to fix it.

2. If you chose to handle your own portfolio, consider increasing bonds and cash to give you comfort.

3. If you rebalance, consider the benefit of blue chip stocks with a healthy dividend.

4. Though money can be made in a bear market by shorting stock (betting it will fall), this is probably only for those who are savvy in techniques related to this area. Even inverse exchange traded funds (ETFs) that short the market requires a certain amount of expertise. This is also true for making a bet on market volatility, for example investing in VXX (I Path S&P 500 VIX ST Futures), which requires nerves of steel.

Or, lastly, another option is simply to ignore occasional market instability and hope for the best. This is almost certainly the best option for most.