Game of Trades: This Is Going to Trigger a Massive Top on the S&P 500
One of the unusual features of the stock market decline this year has been volatility. As measured by the VIX, the market selloff has not seen an extreme spike in volatility typically associated with bear markets.
And relative to the daily swings in the market, volatility continues to look subdued. That’s true even as overall volatility has been steadily rising since 2017, with each bout of volatility higher in the markets setting a higher low point than the previous one.
This type of trend of rising volatility was last seen from 1994-2002, and from 2007-2008. Both periods ended in a crisis before peaking and moving lower once again.
Historically, volatility rises as stocks move down. But the question is if the current trend of rising volatility will continue, or break. While that’s true most of the time, there can be exceptions, as with so many other trends that investors look at.
One counter-example is the rising volatility in the stock market between 1996 and 2000, when the tech bubble was being fueled.
It wasn’t unusual for tech stocks to have massive declines, only to soar and close the year at higher levels. But such a bull run wasn’t healthy in hindsight. So investors seeing rising stocks amid rising volatility should beware a potential bubble.