By Frank Holmes writing at EconMatters
There’s an old contrarian investing maxim from Baron Rothschild that says “the time to buy is when there’s blood in the streets, even if the blood is your own.” The idea is that the best investors strategize when others panic, allowing them to buy stocks on “sale.” The legend of Warren Buffett was built on this philosophy during the market turmoil of the mid-1970s.
There was more “blood in the streets” Monday as the world continued to digest S&P’s downgrade of U.S. debt, the two-week market selloff, and the likelihood the U.S. economy could possibly slide back into recession. These concerns, combined with continued political/economic struggles in the eurozone from socialist policies, have created a potent concoction of fear across global markets and sent volatility skyrocketing Monday to its highest level since the May 2010 “Flash Crash.” While many investors are running for the exits, others have chosen to ride the wave of volatility or buy depressed shares.
The S&P 500 Index has fallen 11 percent over the past three trading sessions. This has only happened fives times since 1960: The 1987 Crash, the Asian financial crisis in 1998 and twice in 2008, according to research from Desjardins. In each of these instances, markets gained an average 9 percent the following month.
The CBOE Volatility Index (VIX) rose more than 46 percent to break the key 40 level, signaling an extreme event, and is up over 164 percent for the year. In general, any time the VIX reads above 30 means conditions are volatile. Above 40, it’s clear the only thing at a premium in this market is fear.
Continue here: VIX HIgh, Time To Buy? (Guest Post) | EconMatters.
