Tuesday, August 9, 2011

Fear Gauge

n the wake of “Great S&P Downgrade” volatility in the stock market as measured by the VIX — the volume of S&P 500 index options — jumped 50% yesterday.

The market’s “fear gauge” closed out the day at 48...

Going back to its inception in 1993, there are only five other episodes in which the VIX topped 45:

• September 1998: Russian default
• October 1998: Long-Term Capital Management (LTCM) implosion
• August 2002: WorldCom collapse
• September 2008: Lehman Bros. bankruptcy and ensuing Panic of ’08
• May 2010: The incestuous “flash crash.”

In four of five of these spooky episodes, you could have done very nicely for yourself buying the Dow 30 as soon as the VIX topped 45… and holding those shares for a year. The blue chips picked up between 1,500-2,500 points each time.

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