Stock market

Game of Trades: It’s Coming. (Imminent Market Volatility)

Posted on by Andrew Packer

Since the market’s latest rally started in November, there have been only a few small pullbacks. Those declines haven’t even managed to lead to a 5% pullback, much less a healthier 10% one. And the Nasdaq has now nearly gone a record amount of time without a 2% down day.

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    • These signs indicate complacency in markets. That’s also supported by today’s low market volatility, which has been rather subdued. It wouldn’t take much of a crisis, real or perceived, to see volatility spike.

    Typically, the volatility index trades between 15-20. It may go a bit higher, perhaps to 30, in a market selloff.

    Volatility spikes over 50 tend to occur every few years. The last big jump occurred in 2020 during the Covid crash.

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    Volatility is technically a two-way street. Stocks can get more volatile as they rally. However, because a market crash usually starts when volatility is low, it’s often the sign of a pullback.

    With market volatility now at a four-year low, the price to hedge market risk is also low. It will soar when a selloff actually starts.

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    • Meanwhile, deteriorating consumer spending and jobs data suggest the economy is slowing. That’s good for bringing down inflation. But it could also mean companies start to miss on earnings. That could kick off a market pullback and lead to a volatility spike.

     

    To look at how a volatility spike could unfold and how to prepare, click here.