- Another rough week for stocks
- Netflix and Tesla to report this week
- VIX denotes more volatile trading
This was a famous line from the movie Wall St. It was another tough week for stocks last week. While the S&P 500 is down about 1.5% and the Nasdaq 100 is down 3%, actual volatility has been much greater than that. After a difficult first three days, the markets saw a massive turnaround on Thursday, only to give up those gains on Friday. This volatility may rise in the coming weeks as companies report third-quarter earnings.
Heading into earnings season, the S&P 500 is down 24% from the year while the Nasdaq 100 is down nearly 33%. Since rebounding over the summer, both the S&P and Nasdaq have traded lower in seven of the past nine weeks. Fears of a recession are growing. Economic data last week showed persistently high inflation, which is likely to lead the Federal Reserve to continue its aggressive rate hike. As it stands now, there is a 98% chance that the Fed will raise interest rates by another seventy-five basis points when they meet in the first week of November.
This week brings a taste of earnings as sixty-six of the 500 companies will hit the S&P 500. Bank of America
There is a lot of talk about bear markets at the moment. As a trader, I have never been more concerned about whether it is a bullish or bearish market. I have always been more focused on the opportunities that exist. However, it is worth noting that when the markets drop a bit, as they have this year, it is not uncommon to see significant gains as we saw last Thursday. But as we’ve also seen, these walks can be short-lived.
For investors new or unfamiliar, the VIX is an index used to express the expected annual movement of the S&P 500 index. We call that, implied volatility and it is derived from S&P 500 option prices. Historically, the average in the VIX is about 16%, Which means that the markets are generally expected to be somewhere between a high or a low of 16% for the year. In fact, markets tend to close within a smaller range at the end of the year. We call that realized volatility. In other words, what the market expects is usually more than what actually happens when all is said and done. However, while actual market closing prices a year later are usually lower than implied, that doesn’t mean that moves in the meantime can’t be significant.
Here is a small trader hack. When VIX is trading at 16, that translates into an expected one-day move of 1%. Currently, VIX is trading at 32, or twice its average. This means that there is an expectation for the S&P 500 to close or fall 2% on the day. We saw a demonstration of this prediction last Thursday. Since most options traded are shorter than one year, the expected daily ranges tend to be a bit more reliable than forecasts a year from now, which is something investors should keep in mind. Also, with earnings season picking up, midterms unfold and uncertainty increases, we may be on our way to more wild volatility. This is why I tend to close these sections with talking about sticking to your investment plan and time horizon.
There are some things we can control and some things we cannot control. But staying automated in our approach to the markets can ease some anxiety and prevent us from making emotional decisions (a nice way to say, irrational). I traded during the 1987 crash, the 2000 tech bubble crash, the 2008 housing crisis, the Covid crash, and yet here I am still trading. Staying mechanical and staying focused is how you get past a challenging market. Like I said, there are a lot of stocks with much lower valuations. For long-term investors looking to take on new positions or add to existing positions, this could be an opportunity. For short-term options traders, the highly volatile market is full of opportunities. But most importantly, try to avoid letting your emotions dictate your investments, especially in a market that moves like this.
tastytrade, Inc. Comments. For educational purposes only.