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.
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