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Do Not Get Vixated on Volatility

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Updated

Volatility means different things to different investors

A lot will be made of the VIX (VXY)(VXX) piercing below 11 today.  I have know some investors who love it when volatility falls like this.  To them, it signals calm in the market (SPY)(DIA).  To other investors, it signals complacency.  They believe that market participants aren’t paying attention to risks, and that the market is due for a fall.

We are currently at the low point for the VIX since January.  So is the market riskier or less risky?  I think if you look at the last 5 years, you would maybe get a little worried about the low volatility.  When we reached this level back through 2013, it has often presaged more volatility and a market dip ahead, with one major exception – 2017.

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When we first hit a 10-handle in early 2017, we definitely had some ups and downs.  But if you had sold out then, you would have missed huge gains in the market.  On the Nasdaq 100 (QQQ), you would have missed a 25% gain.  But more importantly, you would have missed out on a 40%+ gain in FANG (FB)(AAPL)(AMZN)(NFLX)(GOOGL).

So does that mean I think we are off to the races as the VIX plummets to 9?  Nope.  It means I, and everyone else, trying to read the VIX tea leaves have no clue.  Just pick stocks.  Volatility can be good for your portfolio – you get prices you wouldn’t have before and can trim names that are too frothy.

And wow, is the volume low on the NYSE.  If things swing the other way, it will be fast.

So for me personally, I like the VIX at 11 or 25.  9…maybe then I would get a bit nervous.

-JP Gravitt

Follow me on Twitter at @JP_Gravitt

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