A Plan for Anxious Investors Who Fear Missing Out on a Market Recovery
Editor Thenews24.net
3 min read
Let’s explore a strategy for investors who are cautious about buying during this market dip but don’t want to miss out on a potential recovery. Market volatility and corrections are common occurrences, often happening together. When markets drop, volatility tends to rise, turning investor complacency into fear. This fearful environment can create attractive buying opportunities, as Warren Buffett famously advised, “Be greedy when others are fearful.” Historically, a high Cboe Volatility Index (VIX) is followed by above-average returns. Since January 1990, the S&P 500’s average 1-month return has been just over 80 basis points (1 basis point equals 0.01%). However, when the VIX hits 30, the average 1-month return nearly triples. Additionally, the market has historically risen about 64% of the time over one month. When the VIX exceeds 30, as it did on Monday, the market has been higher roughly 77% of the time a month later.
Given this data, and with the S&P 500 hovering near Monday’s closing price after Wednesday’s declines, investing more in equities might seem appealing. However, some hesitation is understandable. Despite a significant drop from the all-time highs of July 16th, the S&P 500 is still up about 9% this year and hasn’t officially entered correction territory. For context, consumers wouldn’t rush to buy TVs at an 8.5% discount on Black Friday. While prices are better than a few weeks ago, they aren’t exactly bargains.
This raises the question: Why did the VIX close above 30 on Monday if the market hasn’t fallen into correction territory? Historically, such spikes usually coincide with full corrections or bear markets. Since January 1990, only one other period saw the VIX close above 30 without the market entering correction or bear market territory either a month before or after, and that was just before the 2020 election, a time of significant uncertainty as the market was recovering from the pandemic plunge.
Could this period be another anomaly with high volatility but no market correction? Possibly, especially in a presidential election year. If you’re worried about further declines, using call spreads might be a smarter way to make bullish bets rather than committing new capital to equities. A call spread defines risk and mitigates the higher options premiums caused by elevated volatility. For example, buying SPDR S&P 500 ETF Trust (SPY) January $525 call options and selling nearer-dated September $550 calls against them in a diagonal spread. This strategy, sometimes called the “poor man’s covered call,” costs less than buying the underlying shares to write calls against, thus limiting the total risk to the premium spent on the spread.
In summary, a higher VIX often leads to higher short-term returns for the S&P 500, but this is usually because a high VIX corresponds to steep selloffs. While this selloff has been painful, it hasn’t yet reached correction territory.
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