Editor’s Note: This episode was recorded right after the correction earlier this month, when the Volatility Index (VIX) was at multiyear highs. Volatility has come down somewhat since then (although it’s still above its 2017 lows). So the references in this video to “last week’s” volatility spike are outdated by a few days.
Nonetheless, Eric’s insights about volatility and the market cycle will never be out of date. We hope you enjoy this informative interview.
Transcript:
Steve McDonald (SM): Our guest this week is Eric Fry of Fry’s Pinnacle Portfolio – the award-winning Eric Fry. He came in first in the nationwide stock picking contest called Portfolios with Purpose, didn’t you?
Eric Fry (EF): That’s correct, in 2016.
SM: Yeah, what was your total return?
EF: 150%.
SM: Not bad.
The topic today, as most people might imagine after the week we had last week, is volatility. Do you look at volatility when you pick stocks?
EF: I look at a lot of macroeconomic indicators, volatility being one of them.
You’re trying to gauge opportune moments to enter and exit a trade, and so the volatility reading – the VIX, as most people know it – is an indicator of relative market complacency or fear. It’s called the “fear gauge.”
SM: Yeah, I’d say we were a little complacent until about a week ago.
EF: Well, as recently as the first week of January, the VIX hit its lowest reading of its entire 26-year history.
SM: Was it 11 or something?
EF: Yeah, it was below 11.
SM: Wow, I didn’t know it got that low.
EF: And by itself, it’s not a very good timing indicator. It’s just an indicator of where you are emotionally or psychologically in the stock market.
And when you overlay that kind of a reading with what, on many valuation metrics, were all-time high valuations in the stock market, then you get kind of a dicey scenario.
And I actually wrote two columns about it in January, saying that we were in a dangerous area.
SM: You say it’s a measure of complacency… What happens if it hits 50?
EF: That’s a measure of fear. That’s the antonym. That’s the opposite of complacency. That’s why it’s called the fear gauge.
The VIX goes up as a measure of options pricing. Options prices go up when people are buying options to protect themselves. That causes the VIX to spike.
And it has gone up about 200% in the last week or so.
SM: I take it you don’t rely on the VIX.
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EF: Not as a timing indicator, but it’s a valuable indicator of where we are in a market cycle.
One of the columns I wrote was about the VIX ETFs or ETNs – the stocks that track readings of the VIX.
Now, those things have doubled or tripled in the last few trading days.
However, they have been terrible investments for the last five or six years because there has been no volatility. The market has been going up and so these things have been going down.
So it’s not a very effective way to hedge your portfolio.
SM: What do …read more
Source:: Investment You
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