Volatility At Historic Lows, Can The Bull Market Continue

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Volatility At Historic Lows, Can The Bull Market Continue

VIX Index Sending Signal Not Seen In 10 Years

The month of May has been notable for many reasons. Trump scandals grew in proportion, OPEC extended its production caps, global equity markets hit all-time highs and volatility retreat to a low not seen since before the Global Financial Crisis. In most cases a low reading on the VIX, the Volatility Index, is an indication the market has little to fear and that bull market conditions are present. The risk now is, with the index at historical lows, that market reversal could be imminent.

What is the VIX? The VIX is perhaps the single most important financial asset a binary options trader will never trade. Also know as the Fear Index it is a gauge of equity options prices relative to the underlying index which in this case is the broad market S&P 500. There are fear gauges for other indices, most notably the VXN which is based on the NASDAQ Composite. The idea behind it is simple, the prices of options will rise when the market is fearful because traders will place a premium on their stocks. The higher the VIX the more fear and the more chance of correction, reversal or out and out bear market conditions.

Click here to learn more about Trading With Volatility

The VIX tends to trade in a range and may trend higher or lower within that range as conditions change. A reading near 15 is considered to be near normal, above 15 things tend to get bearish and below 15 bullish. At this time the index is trending below 12 and very near to the 10 level. The long-term all-time low reading for the VIX is 8.60. The caveat is that the last time the index was so low was during the housing boom of 2006-2007, just before the S&P 500 hit secular resistance, the housing bubble burst and the market entered a time of prolonged bear market conditions.

What traders need to keep in mind is that things are different now. In 2006 the Baby Boomers were still firmly in control of the market and actively selling in preparation for retirement. Considering that Generation X is much smaller than the Baby Boomers, and that the Millennials had not yet begun to get jobs, it is no wonder the market crashed. The basic definition of a bear market is when sellers outnumber buyers and drive prices lower.

Things Are Different Now, Right?

What makes things different now is that the fundamental picture as shifted. There are still some Baby Boomers who’ve not reached retirement age or have yet to retire but they are in the minority. The generation is largely through with retirement selling which leaves the market open for buying and higher prices. Coming in behind them is Generation X and the Millennials who are finally, as a generation, beginning to fully engage with the work force which means one thing; retirement savings, 401K and IRA buying for the next 10 to 15 years will outpace any amount of retirement selling that Generation X can hope to produce. Basically it means a long-term secular bull market.

The takeaway for binary options traders? Don’t be fooled into thinking that a market pullback, consolidation or correction means a bear market is about to start because it likely isn’t. Those times should be viewed as starting points for new, near-term bullish trading with high probability of successful trading.

Volatility At Historic Lows, Can The Bull Market Continue

If you pay attention and are prepared to act in the nextВ bull market, it could mean the biggest potential options profits of your life.

It’s not the first time I’ve written about this type of bull move.

Earlier this year I wrote an article about “the next bull market.” At the time I said,

“The VIX had just hit historic lows around 10 and the market was climbing towards all-time highs. Low volatility means that investors are not fearful about the future prospects of the market. And as you can see below, it is plainly evident in the investors’ fear gauge, otherwise known as the volatility index, or VIX. In fact, we haven’t seen levels this low since early 2007.”

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Well, seven months later the S&P 500 continues to make new highs В every day while volatility hovers near historical lows.

Esteemed analyst Jason Goepfert sums up 2020 quite well in his recent quote:

 “This will surely go down as one of the oddest years in market history, and those oddities keep piling up. On a day that more than 10% of securities on the NYSE and Nasdaq exchanges hit a 52-week high, the Nasdaq Composite slumped more than -1%. That has happened only 6 times in 30 years, almost all in 2003 and 2004, and once in 2020. Stocks struggled over the next two weeks, but we’re not reading anything into this other than it’s yet another brick in the ‘this ain’t normal’ wall that’s built up this year.”

For options sellers, 2020 has been a bear market of sorts. It’s been a tough road with volatility so low; market anomalies abound. To think the Dow tacked on over 1,000 points in just under 30 days is astonishing, but to think this type of rally is going to continue is, well, foolhardy. Just look where we’ve come from since those dismal lows back in 2009.

But 2020 has offered bulls something special. After nine straight years of gains, 2020 has seen the major market index spike higher. In fact, we’ve seen one of the largest 12-month moves in the entire history of the S&P 500 . . . an incredible rally of 41.36%.

Remember, we are not talking about a small-cap stock, we’re talking about a basket of the world’s largest and most stable companies. It’s unprecedented.

But the rally is stretched. As you can see in the chart below, we have now entered territory never before seen (a common theme in 2020). The duration between two 3+% one-day declines now stands at record high of 268 trading days. The record was 266. In fact, this is the first 12-month period in the history of the S&P 500 without a 3% drawdown.

But as we all know, we face an overwhelming number of signs of an overheated market. Just look at the RSI (14) below. We haven’t seen an overbought reading this high in well over 20 years. That’s right, 20 years.

With stock markets tending to “take the stairs up and the elevator down,” as the old saying goes, higher volatility is associated with lower prices most of the time. So, if investors think equities are going lower or will enter a period of stagnation, investors should always think the move will be accompanied by increased volatility, and therefore should be willing to expect higher prices (premium) in the VIX and major market indexes.

In simple terms, low volatility reflects investors paying less for future downside protection. Paying less for downside protection means investors are less concerned about the possibility of downside . . . so low volatility means investors are becoming more “complacent.”

It’s kind of like a person foregoing hurricane insurance because there hasn’t been one in several years. Their recent good fortune of no hurricanes destroying their house has made them complacent about the possibility of future hurricanes.

So indeed, a low VIX represents a certain amount of complacency and lack of awareness of possible downside among investors in equities. And historically when we see extremes in low volatility like what we are seeing currently, a push higher is right around the corner – which means equities could experience a reprieve.

New Options Bull Market

But a reprieve or range-bound move in equities should lead to a tremendous opportunity in volatility.

This is why I think we are entering into a new bull market . . . a bull market in volatility. The question is, how can we take advantage of this next bull market in volatility?

As you can see in the chart above, we’ve seen one other instance over the last 20 years in which volatility hit all-time lows only to rally for the next five to seven years.  I expect the same result this time around as well.

When volatility does return, options sellers will be once again confidently making money in a consistent basis. Heck, as long as we don’t see another historical year of gains, options sellers will once again confidently make money in a consistent basis.

Has the bull market in volatility started? Not yet. We’ve certainly seen it pop briefly recently, but the focus of my research is to show you how to benefit from what will be a long-term trend in volatility. It’s a trend that has paid off for options sellers for extended periods of six to ten years.

Whether Day 1 of this bull market is tomorrow, next week or next year, the information I will present will show you, step by step, how to best profit from the inevitable trend of higher volatility. Click here for more information.

The Volatility Index at Historic Lows

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is referred to as the “fear gauge” for investors. Very simply put, this index indicates whether there is too much optimism or too much fear in the market.

The Volatility Index is inversely proportional to the market stock indexes. When the markets boom, the volatility index drops, indicating market optimism. If the stock market starts dropping, the volatility index starts rising, indicating rising fear for investment.

Volatility Index Optimism

The Volatility Index is inversely proportional to the market stock indexes. When the markets boom, the volatility index drops, indicating market optimism. If the stock market starts dropping, the volatility index starts rising, indicating rising fear for investment.

This week, the Volatility Index dropped down to 9.19. The last time the indicator was that low was the year when it was created, 1993. That year, the index dropped to 9.31 on December 22.

The CBOE collects data from the S&P 500 options series to calculate – in real time – the way in which the volatility index will move in the next 30 days. By analyzing the way the VIX is acting in relation to the S&P 500, an investor can gain a lot of insights into how the markets will move in the near future.

While the Volatility Index has been in existence for just 13 years, there is enough data to notice trends. For example, data shows that August tends to be the most volatile month of the year, followed by September and October, before things settle down for the last quarter of the year. This year, however, things have not followed the trends. September is being touted as the “least volatile” September ever. Stocks are up and the market is booming.

There was a slight spike in the middle of August before the VIX started dropping continuously throughout September. This is despite geopolitical tensions between North Korea and the US, the 2 disastrous hurricanes to ravage America’s coasts and the general chaos in Washington.

The Historic Fall of The VIX

The VIX, in its 13 years of existence, has dropped below 10 only 36 times. Of those 36 times, only 8 were before 2020. This year, the VIX has fallen below 10 28 times, and for the first time in its history, stayed below 10 for 5 consecutive days.

To understand what this means, we need to look at the VIX in relation to the S&P 500. If the S&P 500 moves down and the VIX moves up, it means that the market’s slump is going to last some more time. If both indexes move in the same direction, then it means that there is soon going to be a reversal. If the S&P is going up and the VIX going down (as is the case currently), then it means the market boom is going to continue for some time.

Some analysts are warning of dire consequences to the current markets’ record breaking climbs. That the markets could be heading for a downward spiral very soon. Some analysts have even pointed to similar trends in 2006-2007 – just before the markets crashed and led to another financial crisis.

However, Mark Sebastian, founder of OptionPit.com, feels that it will take something really, really bad to bring a halt to the current market optimism. According to him, seeing the current movements in the volatility index in relation to the S&P 500, the markets still have room to grow. This is the time of the year when the markets are traditionally bullish. And so far, this year doesn’t seem to be different; in fact, the markets are doing exceptionally well for the season. This means, keeping in mind all the factors – a strong Q4, economic data pointing to a growing economy and markets being able to shrug off geopolitical turmoil and natural disasters – the current bull-run will continue for some time.

Matvei is a personal finance professional, entrepreneur, and savvy writer. Matvei’s frugal, yet driven nature applied as the leader of our credit card review team helps our visitors to plan and capitalize on saving opportunities.

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