Increased Volatility Will Lead to Short-Term Buying Opportunities

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Last week we said goodbye to a September that logged one of the worst monthly market performances on record and scared many investors away – but the increased volatility has created buying opportunities, if you know what to look for.

The Dow Jones Industrial Average fell 6% last month, far exceeding the average 1.07% September loss the index has seen since its 1896 launch. The Standard & Poor's 500 Index tumbled 7.2%.

The poor performance rattled investors' nerves and was reflected in the CBOE Market Volatility Index (VIX). The VIX – the "investor fear gauge" – over the last three months had its biggest quarterly increase ever, climbing 160% to 42.96. In the same quarter the S&P 500 fell 14%, its biggest drop since 2008.

While some investors interpret the increased volatility as a signal to run, the decline is actually presenting one-of-a-kind opportunities for investors.

The VIX has only pushed past the 40 mark 3% of the time in the past 20 years, and each time it has preceded a stock rebound. Average returns after the VIX passes 40 are 3.2% for the following three months, according to Bloomberg News data.

"A very high VIX level suggests investors have given up, they're out of the way, and that's a great entry point," James Paulsen, chief investment strategist at Wells Capital Management, told Bloomberg. "It's a contrary sentiment indicator, so when the VIX surges, it says bearish sentiment verging on panic is surging. And the market's a good buy."

Another reason for investors to buy: October is not September.

September might be the market's worst month, but in October the Dow has averaged a 1.36% gain over the last 20 years, according to Bespoke Investment Group.

Good to hear, since we've just finished the market's worst-performing third quarter since 1928.

But to successfully profit from the market's current buying opportunities you have to know how to spot the best stocks and sectors, and sidestep the ones destined for trouble – which is actually what Money Morning's new sister service Private Briefing has taught investors to do.

Private Briefing subscribers have the advantage of getting the best current insights and advice from our team of global investing experts. They were able to learn in "The One Safety Play Every Investor Should Make …" about the investment that has since gained 4.7% while the Dow has fallen 4.6% and the S&P 5.8%. They've also pocketed 4.4% gains from a defensive stock with a 6.1% yield detailed in "Time to be Defensive, and Other Notes From the Front Lines …"

To find out more about Private Briefing and how to handle the market's increased volatility, please click here for a special report.

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