One of the most dominant narratives today is that stock market volatility has gone completely away and is never returning. Is it true?
A research paper titled, “Stock Market Volatility during the 2008 Financial Crisis” by Kiran Manda at the Stern School of Business, New York University observed:
“From 2004 to early 2007, the financial markets had been very calm. The market volatility, as measured by the S&P 500 volatility and the VIX index, have been below long-term averages. However, the financial crisis of 2008 changed this: most asset classes experienced significant pullbacks, the correlation between asset classes increased significantly and the markets have become extremely volatile. During this time, the S&P 500 lost about 56% of its value from the October 2007 peak to the March 2009 trough and the VIX Index more than tripled.”
Six years after the onset of the crisis in March 2008, volatility (ChicagoOptions:^VIX) has slid 43% while the S&P 500 (NYSEARCA:IVV) has climbed 70.52%. Although long-term volatility has indeed trended lower, short-term volatility has not vanished.
This year alone, the VIX (NYSEARCA:VXX) has spiked at least 15% or more on at least 9 occasions, or one-time for every month. And over the past three months alone, the VIX has surged 35% compared to just a 1.32% gain in the S&P 500. (See chart) This has meant plenty of good trading opportunities for volatility bulls.
On July 9 when VIX traded just under 12, financial pundits were predicting the VIX was headed below 10 and we told subscribers the exact opposite! We said via our Weekly ETF Picks on 7/9/14:
“While most market participants are expecting a lack of stock market volatility to be a sustainable trend – we’re betting the opposite. When another short-term pop in the VIX arrives fast and furious, we’ll be ready. We’re buying the VIX (expiration and strike price reserved for subscribers) call options at $200 per contract.”
Just a few days after we published our VIX buy alert via our ETF Weekly Picks, the VIX (NYSEARCA:VIXY) experienced a 32% spike and we bagged a double digit gain because we were ready.
Ultimately, the key to profiting from higher volatility is all about being long VIX (NYSEARCA:TVIX) before the volatility happens – not after the fact.
The ETF Profit Strategy Newsletter uses technical and fundamental analysis along with market history and common sense to keep investors on the right side of the market. Our biggest winner so far in 2014 is a timestamped +188% gain from our 6/5 Weekly Picks.
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