If You Have Cash, Get Ready to Put It to Use
By Dr. Steve Sjuggerud
January 23, 2008
Yesterday morning, we had fear...
I don't remember as much fear as that in recent years.
You may not want to hear this... We almost need fear to outperform the market. We just need to be bold enough to buy when others are afraid, when things look bad.
History shows us that buying in a time of fear can bring home great returns.
Fear is bad now. But it was worse a few recent times in history: The 1998 Russian debt default, for example. Or September 11, 2001. Or the March 2003 Iraq invasion.
According to the stock market's "fear gauge," these times were worse than yesterday. The Volatility Index (the "VIX," as it's called) was higher. When this fear gauge spikes, you end up making money if you're bold enough to buy...
Ian Davis – our in-house number-cruncher extraordinaire – did the math. He found that, whenever the VIX spikes higher, stocks actually do well over the next year.
Ian tested the VIX in two ways... First, he asked: How do stocks perform after the VIX closes at a high level? He found that, if the VIX closes a week above 33 (about where it is as I write), then six months later, stocks are up 13.4% on average. That's versus 4.6% over six months for all periods.
When Volatility Spikes, Get Ready to Buy 
Secondly, Ian tested "spikes" in the VIX. If fear (as measured by the VIX) spikes 30% higher in a week, how do stocks perform going forward? This new test increased the sample size significantly, as the threshold to trigger a trade was much lower. But the result was similar... Stocks were up 8.5% six months after a spike, versus 4.6% for all periods.
It wasn't just six months either... In both of these tests, buying after a spike in volatility was a winning trade three months later, six months later, nine months later, and 12 months later.
Ian's study simply proved what we already intuitively believe. It makes sense... The old adage "buy when there's blood in the streets" applies.
We are in a bear market. Fear is high. The absolute, ideal time to buy is when fear is high but getting better, when things go from bad to less bad. But that's easier said than done...
This year, I'm doing my best not to pull the trigger too quickly. Fear could get worse from here. So I'll be patient.
But I want you to know that fear creates opportunity in markets. When you feel fear in the markets, do your best to "override" your brain's natural inclinations...
If you have some cash on the sidelines, get ready to put it to use. We don't get much better opportunities than when fear begins to subside...
Good investing,
Steve
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