Wall Street Showdown: Fear Vs. Greed
What’s The Deal With The VIX?
I felt the VIX rise up on me, kneel down and clear the market leaves.
My gains drop out where you can’t see. Wall Street, shall I wait and bleed?
Did you just…
Why, yes. Yes, I did. I’m not giving away a link to this song. So if y’all know it, feel free to drop me an email at GreatStuffToday@BanyanHill.com.
Now, Great Ones, today we’re talking about the CBOE Market Volatility Index (VIX), aka the “fear” index.
I kinda gathered that from the headline up there, Mr. Great Stuff…
I don’t talk about the VIX all that often in these digital pages, but when I do … there’s good reason. For instance, the last time I directly talked about the VIX was just ahead of the U.S. presidential election back in September 2020.
At the time, Wall Street was very nervous about the election outcome, and the VIX rose as a result.
That September spike in the VIX preceded a market decline ahead of the November election, as well as a relief rally once the election was over.
The time before that was October 2019, when the market was struggling with the U.S.-China trade war.
The VIX was indicating another potential decline in the market due to growing trade war concerns. However, the Federal Reserve went on to cut interest rates … and the market rallied, while the VIX descended into lower lows.
So why am I talking about the VIX again? Is there some massive market movement coming? Is the bear market about to get worse? Are we headed toward a reversal and a bear market rally?
As y’all probably already know, when the VIX goes up, the market goes down … and vice versa. This is because, as Investopedia puts it:
The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility). The more dramatic the price swings are in the index, the higher the level of volatility, and vice versa.
In addition to being an index to measure volatility, traders can also trade VIX futures, options, and ETFs to hedge or speculate on volatility changes in the index.
Basically, when the risk of a market plunge rises, investors buy the VIX to hedge against losses in their portfolio … thus the VIX goes up.
When the prospects of a market rally rise, investors sell the VIX to hedge against downside risk.
That’s how it’s supposed to work, and countless traders and investors closely follow the VIX just to help them better time the market.
In fact, when the market gets choppy like this, you can expect every major financial news publication to talk about the VIX and how you need to pay close attention to the rising market fear.
Again, that’s how the VIX is supposed to work … “supposed” being the key word there.
The VIX Is Broken
As my close colleague Michael Carr recently said: “The VIX Is Broken.”
Broken. Want proof?
Just look at this chart of the VIX versus the S&P 500 Index (SPX) for the past three months:
Does it look like the VIX and the SPX are moving in opposite directions like they’re supposed to? Nope. The overall trend for both is down.
Where’s your god now, CNBC?
Ha, ha, Mr. Smarty Pants. So what are we supposed to do now?
You know, Great Ones…
There are two major market forces always at play on Wall Street. The first is “fear.” Now, we all know how motivating “fear” can be. Heck, Wall Street named an entire index the “fear index” because investors were so obsessed with it.
But I’m here to tell you … there’s something else.
The afterworld? A world of never-ending happiness where you can always see the sun?
No, Prince. I’m talking about “greed!”
Why does Elon Musk guard his musk? Greed.
Why does Warren Buffett scrape pennies at the buffet? Greed.
If fear isn’t driving Wall Street’s activity, it’s most certainly greed.
You’re about to talk about a “greed index,” aren’t you?
How’d you know?
You see, Great Ones, greed is a much more potent driver on Wall Street. Sure, fear sparks panics and sell-offs, but those are all short-lived. What’s more, stocks go up more than they go down. In fact, in the long run, stocks only go up.
To quote Gordon Gekko:
Now, I’ll be the first to admit that Gekko is not a good role model for investors. But … he has a point.
Fear sparks headlines, but greed… Greed drives bull markets. Greed makes you “1,000% gains!”
Unfortunately, Great Ones, there isn’t an official “greed index” in the same way that there is a “fear index.” There’s no real anti-VIX index that you can use to quantify greed.
Or is there?
Enter … The Greed Gauge.
The Greed Gauge is the newest stock market indicator from Mike Carr, a financial mastermind revered throughout the investing world as one of the top traders in the business.
You know … the same guy who discovered that the VIX is broken? C’mon, we just went over this!
Whereas the VIX’s fear gauge can only give you a read of investors’ fear on the overall market after the fact … the more-powerful Greed Gauge can identify the precise levels of investor greed for each stock in the S&P 500 in real time.
In other words: It can tell you when to buy AND sell any stock that you want.
And how it works is dead simple. When it’s green, you buy. When it’s red, you sell. That’s it.
Mike just went public with the indicator for the very first time. In this video, he reveals exactly how it works, including the precise formulas he used to create it.
As always, thank you for coming to my Great Chat! If you have a stock or investing idea you’d like to see covered in the Great Stuff weekend edition, let us know at: GreatStuffToday@BanyanHill.com.
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Until next time, stay Great!
Editor, Great Stuff