The VIX, the volatility indicator that measures levels of fear, has left traders and investors scratching their heads. Low volatility has been the name of the game this year, no matter what the news headlines read. In July, a record was set for most consecutive days of readings under 10% – and that record may get smashed again in the coming days.
This begs the question: is low volatility really a problem? Only if you decide it is. Let me explain.
Why traders are frustrated by low volatility
Most people associate a low VIX with high complacency, aka, traders have little-to-no fear about a market pullback. This interpretation is generally correct. They feel confident, so buying and selling slow down and trading days are fairly quiet.
However, when buyers continue to pour money into the markets (as they are now), even the most adept psychological profiler can be very wrong. Low complacency is about psychology, not finances or economics, so trying to predict behavior is probably not a good idea.
The real issue is that the current market conditions are useless if you’re using history to guide your trading. If you pour trust into what ‘”should be” happening rather than what is actually happening, you’ll miss the boat every time.
Low volatility is not a problem until it starts to trend higher – then it can become an issue.
If you look back on the first nine months of 2017, you can say with confidence that equity buyers have shown no fear. The really bold ones have even been selling volatility. It’s one thing to be on one side of the market, but it’s quite a different story to double down on a trend that the markets have never been before.
Ignore the noise and trust the markets
Many pundits continue to scream about how these markets are defying the odds, they can’t go any higher, etc. (This has been going on since the Fed instituted QE, by the way.) The market ignores the noise, and you should too. The VIX is measuring how much money is going into the market right now – not speculation or noise. Stick with the facts, and they will carry you where you need to be.
Copyright: fuzzbones / 123RF Stock Photo
