In his latest MarketWatch column, Mark Hulbert says a successful timing model is showing that stocks are approaching “buy” territory.
Hulbert looks at an approach that moves to an all-cash position whenever the CBOE’s Volatility Index (VIX) rises above its median level of just shy of 20, and buys stocks when the VIX falls back below that median level. “The stock market’s average return over the last couple of decades has been higher following below-median VIX levels than above-median levels,” Hulbert writes. “This surprising result held regardless of whether these returns were measured over the following day, week, or month.”
Recently, the VIX — which rose above 20 in late July — has come very close to crossing back below that median level, Hulbert notes. The VIX strategy seems to work because “periods of high volatility tend to be clustered together — an insight that traces to research conducted by Robert Engle III, a finance professor at New York University who received the Nobel Prize in economics in 2003 for his work along these lines,” Hulbert notes. “To the extent the future is like the past, therefore, an investor who goes to cash whenever the VIX spikes upwards will end up forfeiting little return.” That’s hard for most investors to do, however, Hulbert adds, because it means not jumping back into the market even after some explosive upside days.