Editor’s note: Regular readers know that one of our top priorities at the Dispatch is helping you protect your portfolio from volatility in times of crisis.
And that’s been more important than ever this week, as the coronavirus panic wreaked havoc on the markets.
So today, we’re sharing a piece from Casey Research friend and Market Minute editor Jeff Clark. He used to manage millions in Silicon Valley. And he made so much money for his clients, he was able to retire at 42.
Jeff’s a pro at predicting where the market’s headed next. And he says this period of high volatility can’t last much longer… but there’s a strategy you can use in the meantime…
By Jeff Clark, editor, Market Minute
Volatility is exploding higher.
The Volatility Index (VIX) is hitting highs we haven’t seen in years. Stocks are falling. The market is collapsing. And folks are willing to pay huge premiums to buy put options as a hedge against even more downside.
At a time like this, traders need to remember this phrase:
Periods of low volatility are always followed by periods of high volatility, and vice versa.
It seems like now is a good time for some of that “vice versa.”
Take a look at the following chart of the VIX…
The VIX traded above 33 at one point on Thursday. And, the Bollinger Band width (at the bottom of the chart) expanded beyond where it was on Christmas Eve, 2018 – which was arguably the best time over the past year and a half to buy stocks.
The blue arrows point to those times over the past year and a half when the VIX closed above its upper Bollinger Band – indicating an extremely high level of volatility – AND when the Bollinger Band width (at the bottom of the chart) expanded to an extreme level.
Here’s how the S&P 500 performed following each of those occurrences…
On five of the six occasions, the S&P 500 rallied immediately off of oversold conditions. But, even following the one occasion where the market continued lower – last May – stocks recovered and were sharply higher two months later.
Volatility is high right now. The VIX is more than 100% above where it was trading just one week ago.
Now is not the time to be betting on an even further increase in volatility. Traders should be looking for volatility to contract.
That means traders should be looking for stocks to bottom… and start to rally from here.
Best regards and good trading,
Editor, Market Minute