Volatility spikes as stock markets decline. Investors scramble to buy insurance (put options) to protect their stock portfolios and insurance premiums rise rapidly as a result. The Vix Index captures this phenomenon. Options are cheap (low Vix) when investor confidence is high and stocks are in a bull market. Options become quite expensive as the bull turns to bear.
Up until a week ago, the Vix was trading at multi-decade lows. That all changed late last week. The Vix is now spiking as the stock market tumbles. There is potentially a lot of room for the S&P 500 to drop from here (and for the Vix to rise). More concerning, the Federal Reserve has already cut interest rates to zero and has no room left to cushion the next decline.
We continue to recommend a defensive position in the Active Asset Allocator 20% equities / 30% bonds / 30% gold / 20% cash. We have been expecting this stock market correction for months now and are happy to watch from the sidelines. Let's see how it unfolds over the next eight weeks.