Last Friday, the CBOE Volatility Index (VIX), which is often called the fear gauge of the market, hit a five-year low.
If the VIX truly is the fear gauge for the market, then fear has hit a five-year low, and that is concerning for contrarian investors.
The basic premise of contrarian investing is that when everyone is bullish toward a stock or toward the market, there aren’t any buyers left. Everyone that wants to be long is already long.
When there aren’t any buyers left, there are only sellers.
While the VIX hitting a five-year low is certainly a warning flag for the state of the market rally, it is not a sign that you should sell everything.
If you are highly exposed to stocks at this point, you might want to consider lightening up a little. If you have big profits on some positions, take some gains off the table.
One of the things I have always believed in is taking gains on part of the position when there are warning signs.
When a market or a stock is overbought, close part of it. When the sentiment indicators are suggesting that we are due for a pullback, close part of your most profitable positions.
You can leave part of the trade open to take advantage of any additional rally, but you are protecting the downside.
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