My 'Fear or Strength' model has shifted into tactical bullish mode because the Volatility Index (VIX) is above 28.5.
Here’s the chart:
Let's break down what the chart shows:
The black line in the top panel is the S&P 500 index price.
The green shading highlights the model is in bullish mode.
The red shading highlights the model is in bearish mode.
The black line in the middle panel is the 10-day average of the NYSE+NASDAQ net new high advance-decline line - The model's ‘strength’ component. The gray shading represents the AD line is rising.
The black line in the bottom panel is the Volatility Index, which is the model's ‘fear’ component. The gray shading represents the VIX reading above 28.5.
The Takeaway: The ‘fear’ component of this model has been triggered as the VIX reading is above 28.5.
But why is the 28.5 threshold significant?
I went back and analyzed all the percentile ranges of the VIX and discovered that when the VIX reached the 90th percentile, which starts at 28.5, the 12-month forward returns were excellent.
When volatility is at these elevated levels, the S&P 500's 12-month forward return tends to significantly exceed the average returns of a buy-and-hold strategy for the S&P 500.
The GOAT🐐 of investing, Warren Buffett, once said “to be fearful when others are greedy and to be greedy only when others are fearful.”
And right now everyone is fearful…
While we may still experience further downside price action, this could be the time to start seeking opportunities moving forward.
If you find my content valuable, I would greatly appreciate it if you could share it with your friends, family, and colleagues. Your help in spreading the word is invaluable in supporting our work. Thank you to all of you who share!
