Volatility Has Arrived
The financial markets have been swamped with volatility in recent days, but it should come as little surprise to those of you who visit this site regularly. After all, we’ve been talking about volatility for the past several weeks.
Granted, I didn’t – and still don’t – believe the markets are going to experience a full correction (down 20%). But, I’ve said many times we could get a short-term spike in volatility.
And that’s exactly what we’ve seen.
The VIX, perhaps the best overall measure of market volatility, spiked over 30 for the first time since 2012. While it only stayed there for a day, it still gives us an idea of how spooked investors really are.
Here’s the deal…
No single event has led to the spike in volatility. It’s a combination of multiple factors causing the (mostly) downward action in stocks.
In my opinion, the biggest issue is the depression-like economy in Europe. That, along with the economic slowdown in China, could really hurt revenues for US companies (which generate 46% of their revenues overseas).
However, the biggest fear factor right now is the spread of Ebola. Of course, it’s got everyone worried about an uncontrollable epidemic. In reality, there’s very little chance for that to happen in the US… but I certainly understand why people are scared.
And don’t forget, there are still several geopolitical hot spots to be concerned over. The battle against ISIS is still in its early phases. And, the Ukraine/Russia situation is not close to being resolved.
Finally, the Fed’s QE (bond buying) is supposed to end this month. That’s also got investors concerned over a freefall in asset prices. It’s been a long time since we’ve had zero Fed intervention.
If there’s one silver lining to this pullback in equities, it’s that the Fed will definitely have to rethink ending QE. I think there’s a good chance they’ll extend the program at this point. And, additional stimulus could do wonders for the stock market.
Now that volatility is really here, hedging will be more expensive. However, if you are losing sleep over your portfolio, don’t be afraid to pay up.
On the other hand, with the continued strength of the US economy, I don’t believe we’ll get a major correction right now. So, it also could be a good call buying opportunity for cheap stocks (or put selling for those of you who like taking a bit more risk).
Yours in Profit,
Gordon Lewis
Category: Options Volatility Watch
