This Key Indicator Is Signaling Good Times Ahead For Penny Stock Investors

| January 10, 2013 | 0 Comments

VIXTypically, I don’t spend a lot of time writing about market volatility.  I’ve especially avoided talked about volatility indices such as the VIX (the CBOE S&P 500 volatility index).

The VIX is based on S&P 500 stock volatility – and while it’s an important indicator, it doesn’t always tell the story when dealing with small caps and penny stocks.

After all, small caps often march to the beat of their own drum.  That’s one of the reasons I like them.

However, when the VIX does something significant, it can signal an important change in market conditions.  And if overall market conditions are changing, that’s important for all types of investors.

Here’s the deal…

The VIX has recently fallen to lows not seen since 2007.  Keep in mind, that’s before the recession and before the financial crisis really hit home.  Does that mean the stock market is returning to the pre-crisis bull market?

Not necessarily, but it’s a sure sign that investors are gaining confidence.

Take a look at this chart…

CBOE S&P 500 volatility index

What you’re looking at is the last 10 years of VIX performance.  Except for a brief spike above 20 right before the fiscal cliff was resolved, the index has been tame in recent months.

But, with the price closing below 14, we’ve officially come full circle since 2007.

If you look back from 2005-2007, the index spent quite a bit of time at a very low level.  In fact, it was a sustained period below the 200-day moving average (the red line).

So what’s the significance of a very-low VIX?

It means there’s very little volatility built into option prices at the moment.  And that generally translates to less investor fear.  (Another way to look at it is that investors aren’t loading up on puts due to downside concerns.)

A sustained low-level VIX tends to correlate with a bull market.  Of course, it’s too early to tell if this price is going to hold.  However, just the fact that we got here is an important first step.

Now, I expect the VIX to spike as debt ceiling talks pick up – especially if it comes down to the last minute.  But beyond that, it wouldn’t surprise me one bit if the VIX returns to 2007 levels for frequent periods.

And that’s great news for stock investors – penny stock and blue chip investors alike.

Yours in profit,

Gordon Lewis

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Category: Investing in Penny Stocks, Penny Stock Tips

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