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TheStreet Open House

Stock Market Drop May Be in the Cards

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheGoldAndOilGuy.com) -- Over the past five months we have seen volatility steadily decline as stocks and commodities rise in value.

The volatility index is now trading at a level that has preceded many selloffs in the stock market over the years as investors become more and more comfortable and greedy with rising stock prices.

Seeing everyone running to buy more stocks for their portfolio has me on edge. We could see a strong wave of fear/selling hit the S&P 500 index over the next two weeks, catching the masses with their hand in the cookie jar ... again.

If you don't know what the CBOE's volatility index (VIX) is, then think of it as the fear index. It tells us how fearful/uncertain investors are or how complacent they are with rising stock prices. Additionally a rising VIX also demonstrates how certain the herd is that higher prices should continue.

The chart below shows this fear index on top with the S&P 500 index below and the correlation between the two underlying assets. Just remember the phrase, "When the VIX is low it's time to go, When the VIX is high it's time to buy."

Additionally the volatility index prices in fear for the next 30 days, so don't look at this for big-picture analysis. Fear happens very quickly and turns on a dime, so it should only be used for short-term trading, generally three to 15 days.

Volatility Index and S&P 500 Correlation and Forecast Daily Chart

Global Issues Continue to Grow but What Will Spark Global Fear?

Everyone has to admit the stock market has been on fire since the October 2011 lows. The S&P 500 index is up more than 26% since then. It has been a great run, but is it about to end? Where should investors focus on putting their money? Dividend stocks, bonds, gold or just cash?

I may be able to help you figure that out.

Below is a chart of the volatility index and SPDR Gold Shares (SPDR) the gold exchange-traded fund, which tracks the price of gold bullion. Notice that when fear is just starting to ramp up, gold tends to be neutral or a little weak. But soon after investors start selling their shares of securities, we see money flow into the shiny yellow safe haven.

Gold and Fear Go Hand in Hand

Looking at the relationship between investor fear/uncertainty and gold, you will notice scared money has a tendency to move out of stocks and into safe havens.

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