What Selloff?

| October 31, 2014 | 0 Comments

financial-chartsThe bull market returns with a vengeance! The S&P 500 – which was briefly flat for the year in mid-October – is back up to roughly 9% gains year-to-date. Should we be surprised?

Well, the volatility certainly dried up in a hurry. But, that’s how volatility tends to work (which is why so many people short the VIX).

If you’ve been reading my articles regularly, you’ll know this is what we should have expected. The volatility/selloff was based on short-term events and fear, nothing sustainable.

As I’ve been saying for a while now, as long as the US economy is doing well, stocks have a floor on how far they can fall. And, in a growing economy, investors are going to want to be long equities. (It helps that rates are extremely low too.)

Here’s the thing…

The US economy is showing no signs of slumping.

While not every economic report has beaten expectations, the overall economic news continues to be positive. Moreover, there’s absolutely nothing to suggest the country is going to go back into a recession.

Case in point… GDP for the third quarter came out this week and handily beat estimates. Economists were expecting 3% for Q3 GDP and it actually came in at 3.5%. Now, that’s just the first estimate and it could get revised downward. But, it’s certainly an optimistic sign.

What’s more, the Fed seems to believe the economy is doing okay.

The central bank decided to end its QE (bond buying) program this month as expected. According to the statement, the Fed believes the labor market is improving at a reasonable pace along with consumer spending.

So what’s next?

Well, investors will be paying close attention to macro events. Macro risk hasn’t gone away, it’s just a bit subdued. The most important issue is still the European economy. And don’t forget, next week we have elections in the US, which could significantly alter the makeup of Congress.

Not to be overly repetitive, but it’s still not a terrible idea to buy some protection here.

No, I don’t believe a market correction is in store (as I’ve been saying for some time). But, spikes in volatility can and do happen. A long VIX/VXX call or long S&P 500 put isn’t a terrible idea for your portfolio, just for peace of mind.

Yours in Profit,

Gordon Lewis

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Category: Options Volatility Watch

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.