The Lowest Volatility In Years In Stocks- But Not For Long
By Andrew Hecht / TFNN.com
Equities continue to attract capital like magnets. After all, three interest rate hikes from the U.S. Fed since December 2015 have only resulted in a Fed Funds rate of 1%. Another increase in June would put the short-term rate at 1.25%. In Europe and Japan, rates remain at negative forty basis points. We are still in a low rate and accommodative environment which has created perhaps the greatest bull market for stocks in history. Stocks are moving higher with volatility at the lowest level in years. The volatility index, the VIX, has been around the 10 level which is a sign that fear and uncertainty has dissipated in markets and capital has been finding its way into the stock market in search of dividend yield and capital appreciation.
New highs in stocks has become a commonplace event
The slow and steady climb in equity prices has created a self-fulfilling prophecy for the shares of many companies. The more the market rallies, the more capital pours in causing prices to soar to new heights. New highs in stocks have become a commonplace event. The last moment of excitement when it came to a new peak, was when the DJIA struggled to surpass the 20,000 mark in early 2017 but since then, the index climbed above the level, it has not looked back.
As the chart shows, there has been almost no pressure for any longs in the stocks that make up the DJIA since November and the same true when it comes to the other major U.S. indices.
The S&P 500 has recently rallied to a new high at the 2400 level in slow and steady fashion.
The NASDAQ composite rose above the 6000 level in late April for the first time in history, and the index has kept on motoring higher.
The market is complacent, and money flows into equities
As the stock market rallies in slow and steady fashion, volatility has dropped to the lowest level in over a decade.
Recently the VIX dropped below ten, which was the lowest level since 2006. Stocks have been rising and ignoring the many political and economic issues that continue to confront the world. The new administration in the United States has gotten off to a bumpy start with Congress and the press. Relations with U.S. trading partners are changing. Terrorism remains a threat around the world, and North Korea’s continuing missile tests have caused the political and military temperature to rise in Asia. Stocks have been wearing blinders as they continue to take the stairs up to what seems a new high on almost a daily basis in one of the major indices.
Sell in May and go away in 2017?
One of the mantras I have heard in the stock market over the past four decades has been “sell in May and go away.” Stocks tend to go on vacation or move lower during the slow summer months over time. However, this year could be different.
Markets tend to take the stairs up and the elevator down. The last significant selloff in stocks occurred on the night of the Presidential election last November, but since then they have been back on course, climbing to a succession of new and higher highs. At the same time, company valuations have been climbing alongside the prices of equities.
As the chart of the CAPE ratio highlights, the valuation of shares trading on the S&P 500 has only been more expensive twice in history dating back to the late 1800s. Equity prices were higher on a price to earnings basis in the late 1920s leading up to the stock market crash and Great Depression and in the late 1990s before the technology bubble burst. Over the course of history, an elevator ride down tends to follow a period of stock appreciation. With the VIX at 10, stocks making new highs and complacency at a peak now could be the perfect time to start to consider and prepare for a coming correction that may hit the stock market like a ton of bricks. All it will take is one event to turn the bull into a bear, and while the correction may be short in duration, it is likely to be painful for those who do not have the foresight to protect themselves.
NADEX products could be the best way to approach a volatile stock market
Nadex, the North American Derivatives Exchange, offers binary options and spreads on many different asset classes including equities, gold, foreign currencies, and even commodities. These products are ideal for those trading in volatile markets who wish to limit risk.
Binary options are a yes-no proposition where your risk and profit are known in advance of the trade. The settlement payout is always either $100 or $0 per contract; it is all or none at expiration, but one can close out positions before expiration if they so choose. The Nadex spreads slightly differ, offering trading exposure with various price ranges of the underlying that have a variable settlement at $1 risk per tick. Both products have risk, which is always limited to the initial cost. As these markets tend to be responsive to underlying price movement and benefit from the shorter durations available.
Right now equity markets are a one-way street higher, and volatility has declined to the lowest level in almost twelve years. However, when this bull stalls it is likely that volatility will explode. Nadex products could complement your portfolio as a hedge against the risk of a downside correction in stocks. Additionally, binary options and spreads are alternative instruments when it comes to preparing for and taking advantage of an elevator ride that could be a fast and furious departure from current market conditions. The best traders in the world anticipate risks on the horizon. Gravity will eventually cause a correction in stocks, and Nadex products can be an effective tool for mitigating or taking on additional but limited risk when volatility makes trading conditions dangerous.
Nadex Risk Disclaimer
Trading on Nadex involves financial risk and may not be appropriate for all investors. The information presented here is for information and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Any trading decisions that you make are solely your responsibility. Past performance is not indicative of future results. Nadex instruments include forex, stock indexes, commodity futures, and economic events.
Nadex binary options and spreads can be volatile and investors risk losing their investment on any given transaction. However, the limited-risk nature of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.