We are in the fourth quarter, a time when market volatility rises but then falls precipitously towards the end of the year. Savvy and creative traders who know how to trade volatility will find ways to take advantage of awkward situations in the markets to find great buying (and selling) opportunities. But this requires patience and a willingness to be contrarian.
Let’s talk about the current environment.
In November, we have a massive presidential election that remains a tossup. That in and of itself has created uncertainty. The markets hate uncertainty, so expect wide ranges as a result. In fact, since October 2023, volatility buyers bid up the current volatility in anticipation of potential chaos and confusion following the election. The VIX (fear index) remains elevated today.
But after the election, we face a potential drawdown (and lower prices) in volatility. This is due to the seasonal trends around the holidays. Volatility often recedes as markets rise before year end. There are several reasons for this, but the biggest reasons is sentiment (how people feel around this time of year).
Given the strong market performance in 2024, the historical data is on the side of the bulls. When the SPX 500 is up more than 20% by end of September, markets will stay up in the fourth quarter as volatility recedes.
How should we trade around these volatile conditions?
Large spikes in volatility are short-term and temporary. Use these opportunities to add stocks to your portfolio. When the VIX comes down hard and momentum is moving fast, it will be difficult to add stocks. And keep some protection in place, as always.
