Is Volatility Back — and What Does it Mean?

Brad Sorensen
June 18, 2021

After trending lower over the past couple of months and investors being able to rest easy, the VIX (a measure of volatility in the market) has risen recently, indicating a bit more concern entering the market. Putting it in perspective, however, we are only slightly off of record highs and volatility still remains relatively low. Caution is warranted here, however, and investors should make sure they are diversified—a correction of 5-10% in the next few weeks wouldn’t be a surprise, but also would be welcome as a pause that refreshes.

There are some market signals that indicate a pullback may in the offing. One theory on Wall Street is that the bond market is always smarter than the stock market—not sure I always agree with that as a stock guy but the bond market is certainly worth paying attention to. The 10-year yield has actually dropped over the past couple of weeks, not exactly what you would expect when inflation concerns are rising and economic growth remains robust. Is the bond market seeing something in the economy that the stock market isn’t? Impossible to know, but worth paying attention to. Additionally, the volume of put buying in the options market, which is protection for a down move, has moved higher, indicating that some of the Wall Street is at least becoming a bit more cautious — which means the average investor should think about that as well.

Selling everything, or anything, is not necessarily that best way to go but investors should check their portfolios and make sure it’s relatively well diversified. If some positions, especially in the tech sector, have gotten a little outsized now may be a good time to take some profits.

Can it get better?

That’s the question being asked by some on the Street. It’s important to remember that the stock market is a forward-looking mechanism so it doesn’t typically care much about what is going on now, but it looking what may happen 6-12 months in the future. And the next 6-12 months look hard to top the past 6-12 months in terms of stimulus by both the Federal government and the Federal Reserve. I’ll say more about this in the coming weeks, but the lesson for today is that stocks care about the future—so that’s where we need to look.

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