Volatility & The KLCI

VIX had always been the standard of measure to see if an index has trough. A way to determine the trough is when volatility rises. The amount of selling and buying demand increases representing a rapid price change reflecting an increase on the VIX index.

The huge volatility created can be a signal that many buyers are coming back to the market to get involved once again. It doesn’t mean that it is cheap but quantity exceeds quality in market mechanism.

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Over the last year days, S&P500 VIX had spiked to 14.00 which represent almost a 30% increase in volatility while S&P500 merely drops 0.5% from end of March when the volatility was much lower.

The funny thing about VIX is that when market rises, it doesn’t really move up much. The price action is less active in a bullish market compared to a bearish market. With panic selling and enormous demand for stocks with value, this creates a lot of price action within a short period of time spiking VIX.

In conclusion, the spike in VIX when the market falls merely 0.5% signals that people are still interested. But it not quite the big correction that many value investors are looking for yet. As you can see, there’s still a long way for VIX to spike and clearly this is only the start of a VIX rise.

In retrospect, something similar to a VIX data isn’t available freely. The chart below comes from NYU and it states volatility prediction. Assuming that the VIX recorded was accurate, indeed the volatility in Malaysia is rising as well with every retracement on this upward trend.

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Yet, volatility percentage is kind of low at 10% and the current pullback might not be the end yet. Previous spike in volatility somewhere early March was already a sign that sellers started to come in. But the bullish US market continues to propel the market upwards. This might not be the case this time around…

I guess unless there’s a convincing market correction and volatility on the KLCI reaches somewhere close to 14%, it would be a wait and see approach from now on wards. Indeed markets have been on a rally with YTD performance of KLCI close to 6% gain, a serious correction is needed in this bull market.

This bull needs to rest before going on a bigger run.

 

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