uploads///Volatility Index

How to Profit from the Current Market Uncertainty

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Oct. 8 2020, Updated 1:19 p.m. ET

Volatility makes a comeback

Volatility (VXX) has made a comeback in markets this year after a prolonged calm period. Last year was particularly calm as volatility plunged to a multi-decade low, but October’s elevated volatility sent equity markets into a tailspin. US-China (DIA) (MCHI) trade tensions, slowing global economic growth, and the Fed’s monetary policy outlook have been major sources of volatility for US markets lately.

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Fear gauge to remain elevated

The CBOE (Chicago Board Options Exchange) Volatility Index (VIX), the “fear gauge,” has remained elevated. A level of 20 or above means heightened volatility. Although volatility normally returns, it has taken some investors by surprise this time—they may have become accustomed to the unusually calm conditions of 2017.

No more “buying the dip”

As volatility has returned, “buying the dip” opportunities may be gone. According to Morgan Stanley, “buying the dip” isn’t working for the first time in 16 years. As reported by CNBC, Morgan Stanley equity strategist Michael Wilson said, “Such market behavior is rare and in the past has coincided with official bear markets (20 percent declines), recessions, or both.” He pointed out that more than 40% of S&P 500 (SPY) stocks had fallen at least 20%.

In the changing market scenario, investors need to be more selective and think about companies’ long-term fundamentals. Also, as volatility increases and markets worry about prospects, gold (GLD) investments usually increase. Goldman Sachs is bullish on gold prospects as it expects market fear of a US recession to strengthen. For more on gold miners’ dynamics, read Which Gold Miners Look Promising as Gold Rebounds?

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