After being in hibernation for most of the year, volatility is back at the forefront of the markets. The Volatility Index Symbol: VIX (chart) has spiked about 50% over the past couple of weeks which is a clear indication that investors are starting to get a bit nervous and fearful of the markets. The VIX demonstrates the next 30-day expectation of market volatility by calculating the implied volatilities of both puts and calls options of S&P 500 companies. Even the Dow Jones Industrial Average (chart) have experienced intraday triple digit swings over the past several trading days, something we have not seen in a long time. I think it is safe to say that the increase in vol is due in part to the markets continuing to post record highs, the fact that the federal reserve will be ending its asset purchase program this month and seemingly everyday now headlines of geopolitical uncertainty are abound . Furthermore, with the third quarter of the year now in the books, earnings reporting season is upon us. I don’t think it’s a coincidence that volatility has increased with all of the aforementioned factors in play. In fact, this particular earnings reporting season will most likely be put under the microscope like no other recent quarter. Stocks have enjoyed the the accommodative policies of the Fed for the past several years and now one of the key components of the stimulus program will end here in October. As I mentioned in my previous blog, it will be up to corporate America to stand on its own two feet and begin to demonstrate top-line growth as they grow their earnings. Over the past couple of years many corporations have grown their bottom line by way of becoming more efficient, reducing their workforce and implementing stock buyback programs. I believe going forward financial engineering and in-house efficiencies won’t be enough to satisfy investors appetites.
As the third quarter ends and technically speaking, the Dow Jones Industrial Average (chart), the Nasdaq (chart), and the S&P 500 (chart) appear to be finding some support at their respective 50-day moving averages, however, the small-cap Russell 2000 (chart) continues to lag the big-caps and trade well below its 50-day and 200-day moving average. That said, what is impressive to me is even though volatility has picked up steam, most every pullback is met with support from willing buyers and sell-offs appear to be short lived. The concern I have is whether or not this pattern of support continues. As mentioned, Q3 earnings reporting season is on deck and I do not believe companies will be given free passes anymore to modest top-line growth. If you are a trader, this is type of environment that you have been waiting for. However, if you are an investor with a longer term view, then it is time to look at the intrinsic value of your holdings to reduce the impact of a higher vol environment. Also, options premiums tend to increase along with higher volatility which could bode well for option sellers. Whatever the case is, as we enter the last quarter of the year, I expect volatiily to continue and at points increase, which could create some panic selling and create great opportunities with the right companies. I am looking forward to this upcoming earnings reporting season and will look for oversold conditions to act.
Have a great October 🙂