The volatility surge could signal it’s time to buy

On Monday, the CBOE Volatility Index, otherwise known as the VIX, closed at its highest level since October 2011. Earlier in the day, volatility surged to hit a high not seen in more than six years.

According to one options expert, the spike could indicate that a bottom for the S&P 500 is right around the corner.

The popular fear gauge skyrocketed almost 90 percent on Monday morning, landing briefly above 50. The last time the VIX surpassed 50 was in March 2009.

Brian Stutland of Equity Armor Investments said there have been 69 days when the VIX reached above 50, all of which took place during the financial crisis of 2008 and 2009.

“To see it happen today where news seemed less severe than a credit crisis, seems like there was pure panic in the marketplace,” he said Monday.

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The volatility index is calculated based on price of S&P 500 options, which are commonly used for hedging risk. The VIX goes up when investors are more willing to pay a premium on options for that protection. By market close on Monday, the VIX was up more than 40 percent.

“To go out and pay astronomical levels in the VIX seems like it’s more panic than true selling,” Stutland said.

On Monday, the S&P extended losses into a five-day sell-off and closed down almost 4 percent, entering correction territory.

Stutland said the increase in volatility is a starting sign of market capitulation, in which investors give up prior gains and sell off stocks to get out of a risky market. This could lead to a bounce or reversal in the market and a buying opportunity for investors.

“Somewhere around the level we saw this morning is probably an entry level… to put some capital to work,” Stutland said, once volatility calms and the S&P reaches between 1,830 and 1,870.

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For now, investors are still worried about global markets and an overvalued stock market, he said, which will likely lead to the Federal Reserve pushing back its plan to raise interest rates.

“When you see big, huge, astronomical VIX spikes in a one-month time frame, the market is saying ‘I need help.’ Until the Fed steps in with liquidity, you really have to be careful about the downside risk to this market,” Stutland said.

The VIX is up more than 200 percent for August. If the index finishes the month at this level, this will be its largest one-month percentage gain in history.

In a note on Monday, Barclays pushed back its forecast on the rate hike from September to March 2016.

“Although we continue to see economic activity in the US as solid and justifying modest rate hikes, we believe the Federal Reserve is unlikely to begin a hiking cycle in this environment for fear that such a move may further destabilize markets,” Barclays’ economists wrote.

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