For some time now, we have been keen observers of the Volatility index (VIX) and right now we believe all investors need to try and understand what it means. Without going into too many intricate details, it is one of the most reliable fear gauges in the market. When the VIX is rising like it is now, investors need to exercise more caution and be selective in what they are buying. You can see right now how many consumer staples are outperforming the rest of market. Look specifically at Kimberly Clark (KMB), General Mills (GIS), Altria Group (MO), and Verizon (VZ) and you will see how well they are holding up.
Getting back to the VIX, it is important to understand that when the VIX goes to extremes (above 40), we are almost always in the crux of a bottoming process and feeling the most pain. Like most painful events, it too will come to pass. Look at the chart below and see the last few times when the VIX made a significant spike.
You will see the big spike in 2008 representing the Lehman collapse, the big BP oil spill in the spring of 2010, and now today.
Look at the chart below of the S & P and see what happened to the markets several months later.
What you see is the markets eventually bottomed and moved higher once the VIX started to come down. Fear began to recede.
Right now it appears to us we are in the middle of a correction and would remain nimble and defensive until we see the VIX heading under 30 or a huge spike from here in which case we would be aggressively buying. Technically the markets appear to want to grind lower and selling the rally's continues to work.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.