How the Volatility Index is a Guide to Investment?
There are times when the Volatility Index; S&P 500 looks quite strong. This has been observed even when the global economic situation is weakening. In such a case, many may wonder what could be a sustainable stock analysis with which the above situation is justifiable. Investment in stocks needs an idea about the same.
It is necessary to understand the reason for the S&P 500 exhibiting such solid levels despite the slowdown in the economy. For this, we must evaluate the method in which stock analysis is conducted. Firstly, it would do well to remember that the stock market always looks in the forward direction. This is the first step that one must comprehend during stock investment. It implies that whatever may be the current situation of the economy, the coming period of six months to one year and more is more important while considering stock analysis in order to gain a fair idea of the way the market will behave at that time and hence how to currently determine the stocks for investing.
As we know, the Volatility index or the VIX is an estimate of the market volatility. When the volatility shows spikes, generally the market goes down, or we could call it a market crash. For low volatility, there is a gradual climbing up of the stocks.
When there are periods of low volatility many a time, they are met with vicious shifts down in the market. During such times of almost- still market positions, there are greater chances of pullbacks and investors must be aware of the same and hence always must be prepared that the stock may reverse its previously continuous trend.
Many stock investors are interested in the activities of the Central Bank. If there is an expectation or anticipation of a monetary stimulus most of the investors feel that it is the time when investing in stocks would be relatively safe. But it would be better to wait before following the herd mentality. For, the above judgment could just be wrong!
Many financial experts believe that during the times of extreme volatility, when the investors’ fear is at the highest, this is the time when stock investment can be a really profitable venture.
Whenever the volatility index sky-rockets up, the stocks generally crash and the investors’ fear reaches it peak. At this juncture, most are reluctant to put their precious money anywhere. Contrastingly, they believe that it is safe to invest when the market is muted. As a result, they end up losing money. Hence, it is not easy to do stock analysis and so requires a lot of expertise to gain knowledge in this field.
If the monetary stimulus cannot achieve what it was meant to achieve; i.e. put the struggling world economy back on the track to normalcy, then there is danger of a huge sell-off. It would be a prudent move to protect one’s capital investment and put off the share-purchasing program till the time when its value becomes quite cheap and the fear in the investor’s mind is at its highest.