August 14, 2013:
Let’s talk today about volatility and the stock market, and how to use the VIX Index. The last few weeks have seen most companies making their quarterly earnings announcements. Emotions have been running high, and these emotions show up as big moves in stocks, both up and down. I have seen many stocks make 10-20% moves upon their earnings announcements.
Yesterday saw American Airlines drop about 50% on news the Justice Dept. may disallow the merger of American and US Airways. Today the stock dropped another 13%. ExOne, a 3D printing company stock, dropped over 11% on their earnings announcement.
These kind of moves make it difficult to be a stock investor. Yes, a big price move is great if it is higher, but really painful or disasterous if it is lower.
When emotions become strong and stock prices start making big moves, it is usually best to move to the sidelines. The risk of loss greatly increases during these periods, and smart investors are always looking to reduce risk.
VIX is the ticker symbol of the Chicago Board Options Exchange Market Volatility Index. The VIX index is used by stock market traders as a highly watched measure of volatility as measured over a 30 day period.
Most of the time, the VIX has an average value of around 19. But during times of stock market panics, it can quickly spike upwards of 60, with an all-time high of 89.53 in October 2008. For this reason, it is also known as the fear index. A spike in the VIX index can frequently spell the end of a market correction or panic.
Experienced stock market traders watch the VIX to help determine when a stock market correction is coming to an end. Spikes higher in the VIX spell emotional exhaustion for the stock market, and generally the VIX moves back down quickly after a spike.
The stock market ended with the Dow down 115 points today. There have been a number of distribution days in recent weeks, which is when the market closes lower on higher volume than the previous upday. Too many distribution days in a short period of time shows that the rally is failing.
High volatility and a good number of distribution days means moving to the sidelines on further stock purchases for now.
Mondelez (MDLZ) closed today at 31.60, again under my 32 breakout price. Volume was higher than the previous day, but still below the average volume of 10 million shares. I will still hold the shares until I see a high volume selloff, or it hits my sell-stop loss order. Given the market’s current climate, I expect I may end up selling the stock. But I always let the market’s action take me out of a position, not what I think may happen. This helps keep the emotions in check.
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