Dealing With A Low Volatility Environment
For many, it's been tough to keep pace with the upward trend of the markets. Options trading make it a bit easier but with little market volatility it means option prices are cheap (that's a double edged sword - more below). It seems new all time highs are registered almost daily in the SPX 500 and Dow Industrials with ease but we still hear the complaints: 'markets cannot continue to go up, traders are complacent, eventually we'll pay the piper, etc'. Yet, these warnings and those by other strategists are just ignored by the markets as they take flight. Bull markets are always hated because nobody wants to be left behind, and those on board are constantly looking for a place to jump off.
We will start to hear about the VIX this week, reaching multi year lows under 11% for the first time in awhile. It sure smacks of complacency, but as the markets rise to new heights that doesn't seem to matter. Many of the complaints about the markets from just a few weeks ago have disappeared for now. While we could be due for a breather and some backing/filling the next dip could be a huge moment for sidelined buyers to step back into the fray. Late to the party? Sure, but until we have signs of institutional selling (of which the buying signals just became apparent!) then the trend is your friend.
With the low market volatility it means options are cheap, thus buying some insurance (puts) is inexpensive. Let's remember this is insurance against a catastrophe like a deep market correction. The market is currently not pricing in good odds of such an event occurring in the next 30, 60 or even 90 days. Any news event or shock could change that posture quickly. In the meantime, we have a market that continues to move upward in the face of doubt, or the proverbial 'wall of worry'.
I prefer to let the market tell me how to proceed. The IBD took the markets to 'confirmed uptrend' just under two weeks ago from 'market in correction', where it was lying in state for nearly 2 1/2 months. They see what most technicians are seeing as well, that market strength should be respected. Take a look at the chart of the IWM below. We can see there is a clean break the the most recent consolidation the last couple of days on good volume. What's interesting, many were saying this was going to lead the markets lower, yet the opposite appears to be working.
This broad index has flexed its muscle and joined the crowd, and now it's only 4% off all time highs. That's what markets do - zig when everyone wants to zag. Now, is it too late? I don't believe so, but let's see how things materialize. We could be back to a 'buy the dip' mentality, and if that is true then we'll see prices rise as many more jump on board. Just be ready to protect your portfolio (in options trading, that is using puts as protection).
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