Why I think now is the right time to buy stocks?

Four days ago on Oct 4, I made a bold statement that I thought it was the time to get into the stock market. Literally I also switched my 401k money parked in the money market funds to stock funds the next day. While the market jumped back significantly in the last few day, it does not prove yet that I have made a right call. It is just too soon to be sure but I’m confident that I’m right. Why?

One thing to gauge the market direction is the market volatility. The most famous one is the S&P500 volatility index, VIX (see below the VIX chart for the last 5 years). When there is panic, VIX jumps high and the stock market crashes. When investors are complacent, it drops and the stock market  ascends.  As simple as that! One year ago, I said VIX was too low with too much complacence. But now I think it is too high with too much panic. If you examine the VIX chart carefully, you may find the pattern: if it drops below 20, it usually means the market is too complacent and too high. However, it rarely goes beyond 40, which means the market is in extreme panic. But notice what happens thereafter? In the last 5 years, only 3 times VIX jumped beyond 40: 2008 (financial meltdown), 2010 (Flash Crash), and now 2011 (US & Europe debt crisis). But high and extreme panic is not sustainable for long time. It is just the nature of human beings. Soon after the volatility reach its climax, it always comes down and retail investors will very quickly forget what has happened and very soon everything will be fine for them, which will translate into a higher stock market. This is the psychology of herd investors, reflected by the technical analysis via charting. Volatility is one key part of such analysis.

Of course, technical analysis is an art, not science. There is nothing which is perfect, especially in terms of timing. I may be too early, but at least I can make some informed prediction what is the likely next move of the stock market. Guided with this ability, the odds for your success will be much higher in trading and investing, but no guarantee. Also importantly, I'm not talking about the trend in years; rather just the next few months to half a year or so. What will come after that? I don't know and we have to see at that time. The overall economic situation around the world is just too messy to make a reasonable long term prediction.