Psyching Up To Buy At Maximum Pessimism Levels

Stock markets are tumbling and so are your investments. What should you do? Buy (if you have some cash).

At least that is what the fear gauges are saying. Readings show pessimism has not been this deep since compilation of the gauges began. And as one of the investing greats, John Templeton, said: “Buy at the point of maximum pessimism.”

A leading gauge of investors’ fear level is the CBOE Volatility Index [VIX]. It measures the implied volatilities in U.S. stock options. The idea behind it goes something like this: nervous investors buy put options to hedge/bet on falling prices, so the more they bid for put options, the more they signal bearish sentiment.

[The CBOE Volatility Index rose above 60 Thursday for the first time ever. - Ed]

Comments

[DaveW:]

Trying to choose the point of maximum pessimism is like trying to pick the bottom. Just because the VIX is above 60 doesn't mean it won't go to 70 or 80. Choose carefully.

2008 Oct 09 07:28 PM

[Smarty_Pants:]

On Sept 24th Larry wrote:

"stocks are currently inexpensive going by historical norms."

The Nasdaq 100 (NDX) closed just a bit over 1661 that day. On Sept 25th and 26th NDX closed higher at 1687 and 1672. Every day since then NDX has closed lower than it was on the 24th. It closed today (10/9) at 1275, down over 23% in just 12 trading days. Guess those stocks are a little more inexpensive now, eh?

Now Larry says: "Buy" after 8 consecutive down days in NDX (if you have some cash).

If you bought his 'inexpensive' recommendation two weeks ago, you'd have 23% less in your account today.

Maybe you might want to see the market at least hold a trading range for a while before you throw caution to the wind and try to catch the falling knife.

If you keep saying "Buy" every week the market goes down, eventually you'll be 'right' and get in within a week of the bottom. How much cash you have at that point is anybody's guess.

Most of the outstanding traders usually say to buy on the way up AFTER the bottom is in, not try to guess when it will happen and get there first. Have patience.

Caveat Emptor

2008 Oct 09 07:46 PM

[GKM:]

Nicely done Smarty_pants.

If you have no idea where the bottom is, you shouldn't be buying and the author is clueless in that respect. In fact all those saying buy buy buy are only feeding the fire. It's only when guys like this are saying you shouldn't own stocks is where we'll find the real bottom.

2008 Oct 09 08:09 PM

[Pauly B:]

No one can call an exact bottom and I dont disagree that stocks are undervalued and some are cheap but why these experts say buy when the freight train is headed right for you I will never understand? Give me two months of relative calm in the markets and improvement in key economic fundamentals and then I will consider it.

2008 Oct 10 08:34 AM

[HedgeThat:]

When people stop picking bottoms is exactly when we'll have reached capitulation.

2008 Oct 10 08:56 AM

[kurt walter:]

I am going to be like a TV talking head and pull a number out of the air. Dow 6260.

2008 Oct 10 10:28 AM