How to Profit from Market Volatilities

Dear PGM-Capital Blog readers,
This weekend we would like to discuss with you the “Market Volatility Index”, better known as the VIX-Index or Fear-Index.

The volatility index (“VIX”) is an index that measures expectations of volatility, or fluctuations in price, of the S&P 500 index. Higher values for the volatility index indicate that investors expect the value of the S&P 500 to fluctuate wildly  up‘, ‘down‘, or both, in the next 30 days.

Thus, this Volatility Index (VIX), is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market. When sentiment reaches one extreme or the other, the market typically reverses course.

When the VIX is low, it means that fear in the market is low and when the VIX is high it means that fear in the market is high. Normally the markets behave rationally in a low VIX environment and irrationally in a High VIX environment. Due to this fundamental investors can use the VIX index to hedge against market volatility caused by fear and irrational trader and investor behavior.

For the past two years. our research team has been putting a lot of effort in trying to find a correlation or inverse correlation between the VIX index and the value of our portfolio, which is based on fundamentals in accordance with Value-Investing.

As you can see from below 5-year chart of the S&P-500 and the VIX-Index, the value of the S&P-500 has a reciprocal correlation with the value of the VIX. Which means that by trading a Long or Double Long VIX ETF  in order to hedge against market volatility, subsequent irrational behavior of the markets in time of fear and uncertainties, investors can protect the total value of their portfolio and make it less volatile.

With the S&P-500 at a 4-year high and the VIX index at a 4-year low, and closing today March 23 2012 at 14.82  -0.75 (4.82%), we think that the time is right for buying the VIX and/or Double VIX ETF in order to protect the portfolio against increasing volatility that might eat into portfolio value.

Keep in mind that buying the VIX ETF is one way of hedging against volatility and market incertainties, Gold is also a good hedge against incertainties and dilution of portfolio purchasing power.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration.

Please feel free to call us for us to talk about your future.

Yours sincerely

Eric Panneflek


One thought on “How to Profit from Market Volatilities

  • Dear Eric,
    You’ve known me for quite some time and know that I’m not prone to giving compliments easily, certainly not in writing. This time, however, I think I must give you and your staff the highest possible compliment!
    What you guys have discovered gives an enormous boost to the potential investor’s sense of security, whether he/she is a value investor, in for the long haul, or the shorter term ’trader’, who’s in for a quick profit.
    Any investor, short or long-term type, is very much aware of the risk factor. Some can “stand the heat in the kitchen”, others can’t do so very well. It has to do with character – the psychological build-up – and knowledge. The latter is a matter of being informed, of having studied the market, the economics of investing, etc., so that one is capable of doing one’s own analysis, and can then compare OWN conclusions with those of others and experts that publish their stuff all over. Not being well-informed creates a problem, which is mitigated if one’s broker/investment ‘guru’ is trustworthy and whose advice has proved him/her to be right in most cases.
    Having said all this, brings me to the issue at hand. You have now given the investor a tool that will CONSIDERABLY reduce his fear/uncertainty/ irrationality, etc., because now there is a tool that correlates with these very feelings, and in such a way, that the investor will BENEFIT from the sometimes dizzying swings of the market. And as those benefits are reaped, either in pocketed cash or in continued investment in the “good stuff”, he/she will be better off, both financially and – a very important consideration – LESS STRESS due to less uncertainty!!
    THIS is the very KEY of success any investor – long-term, short term, big or small – would love to have and be willing to pay for.
    So, there you are! Excellent find and a key to further prosperity for your clients and your company.

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