Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
The Federal Reserve And Drug Addiction – A Prediction - 27th Jun 17
Charts Show Why Emerging Markets Will Be an Essential Part of Your Portfolio Going Forward - 27th Jun 17
Former Lehman Brothers Trader: I Bet My Reputation That Stocks Bubble Will Pop In A Year - 27th Jun 17
US Bonds and Related Market Indicators - 27th Jun 17
Stocks At Record Highs: Market Sentiment Still Bullish - 27th Jun 17
Stock Market Running Out of Steam - 27th Jun 17
Gold Back With A Vengeance As Bitcoin Bubble Bursts - 26th Jun 17
Crude Oil Trade & Nasdaq QQQ Update - 26th Jun 17
Gold and Silver Ongoing Consolidation May End Soon - 25th Jun 17
Dollar May Become “Local Currency of the U.S.” Only - 25th Jun 17
Sheffield Great Flood of 2007, 10 Years On - Unique Timeline of What Happened - 24th Jun 17
US Stock Market Correction Could be Underway - 24th Jun 17
Proof That This Economic Recovery Narrative is False - 24th Jun 17
Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - 24th Jun 17
Gold Summer Doldrums - 23rd Jun 17
Hedgers Net Short the Euro, US Market Rotates; 2 Horsemen Set to Ride? - 23rd Jun 17
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

New Low Stock Market Volatility Could Mean It's Time to Sell

Stock-Markets / Stock Markets 2013 Feb 22, 2013 - 12:24 PM GMT

By: Money_Morning

Stock-Markets

Keith Fitz-Gerald writes: The average daily price volatility of stocks has fallen more than 60% since the beginning of 2013. It's the biggest straight-line drop in some 82 years.

A lot of investors are rejoicing. After all, stocks have risen an average of 17% a year when volatility is as low as it is right now, Bloomberg reports.


There is, however, a dark side to low volatility. Namely, it tends to precede powerful reversals that can wipe out investors, as was the case in 2000 and early 2008, and at other key turning points over the past 100 years.

Today, I'm going to talk a bit about what low volatility means for you in terms of upside, and also show you how to protect yourself in a downslide.

Let's start with the concept of average daily volatility itself.

What You Need to Know About Volatility
Average daily v olatility is a technical term used to measure the average price variation (in this case, stocks) over some period of time. Using the S&P 500 Volatility Index or the "VIX" as it's commonly known, market technicians compare current readings with readings from other time frames in an attempt to determine whether or not the markets are relatively calm or filled with angst.

What you really need to know boils down to this: Average daily volatility is low when the daily price action is within a relatively tight range from top to bottom, like it has been recently.

Conversely, it's high when the daily trading range widens, as is the case when the markets become uncertain.

The theory is that the markets tend to do better when volatility is low and poorly when it's high.

Investors, on the other hand, do better if they buy when volatility is high and sell (or at least harvest profits and rebalance) when volatility is low.

How can that be?

■Very few investors understand that volatility has nothing to do with market direction. That's because volatility is calculated by taking both positive and negative price movement into account. In other words, it's really a measure of price dispersion (or how widely prices vary). There is no directional bias nor input whatsoever - that's merely the result of people reading conclusions they want to see into data that appears to support their opinions.
■The other thing to bear in mind is that periods of low average volatility tend to precede sharp increases in average daily volatility. Volatility, in that sense, is like a heart attack that appears out of nowhere. When it hits, there's very little you can do. Prevention ahead of time is key.

You can see this quite clearly in the following charts. They cover four of the most significant market turning points in the past 12 years: 2000, 2003, 2007 and 2009.

For example, notice the protracted period of low volatility from early 2005 to late 2007. Investors blindly piled in as the markets rose ever higher.

If you remember, the headlines of the time were filled with optimistic news and millions of investors thought the housing bubble (which had replaced the dot-bomb bubble of a few years earlier) was some sort of panacea. Wall Street, with very few exceptions, was only too happy to let the good times roll.

Yet, at the same time a small group of savvy investors were pulling in their horns, harvesting their gains and building up protective positions.

They knew then what I am telling you now...that periods of abnormally low volatility are a warning bell.

I remember one presentation I gave in Mexico in November of 2007 particularly well. When I whipped out a very similar chart, the audience visibly recoiled. They couldn't fathom that the markets could and would shift as radically as I suggested based on my analysis of the changing volatility situation at the time. In fact, my publisher, Mike Ward, was convinced he had hired the wrong guy as Chief Investment Strategist.

A few months later, however, after I had helped tens of thousands of subscribers sidestep and even profit from one of the most vicious market declines in recent history, he wanted to know if the reverse was true.

"Could volatility analysis help subscribers spot the beginning of a rebound?" Mike asked.

"Absolutely," I told him. I've circled those points in green above. You can see as easily as I do that volatility spikes often occur ahead of major market bottoms. Fear sets in and millions of investors make a mad rush for the exits all at the same time. That's why.

Sometimes this happens days ahead of a major bottom. Other times it's a week or even a month or two before the actual turning point - there's no way to know exactly.

But that's really moot. When you are using volatility analysis properly, the goal is not to time the markets but to identify periods of relative stability and instability so you can manage your money more effectively and more profitably.

What to Do Now...
And that brings me to what investors should be doing now that volatility has dropped to levels consistent with the bull run from early 2005 to early 2008.

First, there is no way of knowing how long the bull market will run. So you've got to prepare for the possibility that we'll get another 3 years of bullish behavior like we did from 2005 to 2008.

That's certainly what the Fed wants and why central bankers around the world continue to flood the markets with cheap capital.

The best choices, under the circumstances, are "glocal" stocks with diversified international cash flow, real products and services the world needs as opposed to merely wants. Companies like ABB (NYSE: ABB), CNH Global (NYSE: CNH), and McDonalds (NYSE: MCD) are all great examples because they bring an element of stability to any portfolio.

Glocals typically pay tremendous dividends, too, which never go out of style.

Glocals are great places to hang out if the rally continues and super places to be if things turn defensive. That's because history shows the markets treat them far better than their non-global, non-dividend paying brethren when the stuff hits the proverbial fan.

Second, many investors are sitting on significant gains at the moment (assuming they've caught the rally off of the March 2009 lows, as many Money Morning and Money Map Press subscribers have.) History shows that now's the time to begin harvesting those while also thinking about rebalancing your portfolio, a topic I cover in my new mini-book, The Money Map Method .

Doing so forces you to harvest your winners and continually reinvest your gains in undervalued choices over time. This not only helps keep portfolio management costs down, but ensures you are in the markets as effectively as possible with as much upside as you can handle.

If you're not sure what to sell, nor when, try trailing stops. By ratcheting these up as prices rise, you are not only potentially locking in corresponding gains, but you are automatically ensuring a sell discipline that will help keep small losses from turning into catastrophic ones if the markets do roll over.

If you're a more sophisticated investor, put options can help you accomplish the same thing without having to sell and are, therefore, a great alternative if you absolutely positively can't bring yourself to unload a favorite investment.

And, third, begin buying specialized inverse funds like the Rydex Inverse S&P 500 Strategy Inv (RYURX). It goes up when the markets go down.

Studies show that having 3-5% of overall investable assets in truly non-correlated choices can lead to significant profits when many other investors will be crying in their beer.

My point is, no investor has to suffer the ravages of a bear market if they are properly prepared and understand what volatility is really trying to tell them.

[Editor's Note: Keith Fitz-Gerald's track record is jaw-dropping. At the moment, 78% of the recommendations in his Money Map model portfolio are in the win column.
And that's not to mention the 44 other double- or triple-digit wins Keith's rung up for his readers across the board since the Great Recession began in 2008.
His secret is the proprietary 50/40/10 Strategy and his amazing Money Map Method.
If you would like to learn more about Money Map Pressand receive a free copy of Keith's latest book entitled: The Money Map Method: Lifelong Wealth in a World of Runaway Debt, click here.]

Source :http://moneymorning.com/2013/02/20/is-george-soros-about-to-short-the-british-pound-again/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife