The increase in volatility in the stock market came to a tipping point on August 5 when the CBOE Volatility Index (VIX) traded as high as 65.73. That’s a level it has rarely reached in the past. As I mentioned last week, the last three times that happened the market was experiencing extreme panic.
The same can’t be said about last Monday – it appeared to be a one-off situation.
When investors and people in general panic and make emotional decisions, it often leads to terrible decision making. Investors who panic-sold on the morning of August 5 are likely now wondering how to get back into the stocks they sold – but at much higher prices.
As you can see in the chart below, the VIX rarely trades above 50. But when it has hit that extreme level, it’s often a bullish signal.
Since 1990, there have been 92 days when the VIX has traded above 50. One year later, the market was up in all but one instance. That’s 98.9% of the time. Adding to this bullish trend is the fact that the average gain over those 12 months is 33% – about three times greater than the average year’s performance.
Another headline that has created fear in investors is the Nasdaq moving into correction territory. As of yesterday’s close, the index remains down more than 10% from its high. A correction, by definition, is a pullback of 10% to 20%.
But there’s more good news for investors with a time horizon of at least 12 months…
The Nasdaq averages a 13.3% return per year. After a correction, the index has averaged a 15.6% gain over the following 12 months.
Of course, some individual stocks will perform even better than average.
Consider Taiwan Semiconductor Manufacturing (TSM). It’s one of the most important technology companies in the world. Without its advanced semiconductors, industries far and wide would struggle to operate efficiently.
The stock fell as low as $133.57 last week. That marked its lowest level in three months and a 30%-plus pullback from its July 11 intraday high. One week later, Taiwan Semiconductor was up 25% to close at $167.63.
Of course, hindsight is always 20/20. But the point here is that freaking out or panicking when volatility increases almost always results in wrong investment decisions.
Stick with your strategies. And if you’re comfortable enough, take advantage of the selling to go bargain hunting.
Here’s to the future,
Matt McCallEditor, Market Insights
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