Buckle-Up for a Roller-Coaster Autumn
Labor Day is now behind us. We’ve reached the autumnal side of summer. As nights get longer and days shorter, what lays ahead for investors?
I believe that underlying conditions are still in place for a continuation of the bull market. But with the advent of autumn, we’re likely to experience greater volatility. Buckle up.
Below, I’ll pinpoint a way to profit from volatility’s increasing velocity. For savvy traders, success derives from understanding and exploiting volatility, not fearing it.
Over the last 20 years, September on average has been the worst-performing month for the S&P 500. Whenever summer comes to an end, there has been a pronounced tendency of volatility to increase. In terms of largest average monthly moves, September ranks number one and October number two (see chart).
Often referred to as the “fear index,” the CBOE Volatility Index (VIX) portrays the market’s expected volatility over the next 30 days. The indicator should push higher in coming weeks.
A major reason for greater volatility in September-October is seasonal behavioral bias, as the end of summer prompts investors to pocket gains. I expect this historical tendency toward volatility to be exacerbated by changing monetary and fiscal policies.
Investors are hanging on every utterance from the Federal Reserve these days, as they wait with bated breath for tangible signs of tapering.
Congress also is considering President Biden’s ambitious infrastructure proposals, in a political climate that remains bitterly divided. The vagaries of COVID Delta and continuing chaos in Afghanistan add to the volatile mix.
We’re witnessing an unusual confluence of events. Investors are not sure where to look for a steady gaze point when so many unknown critical data points are in flux.
Most investors can withstand short, swift downturns. However, week after week of volatility can erode confidence and make investors get nervous. And nervous people start making mistakes.
Fueling this anxiety has been the uneven pace of economic and jobs growth, with each new report triggering mood swings.
Last Thursday, initial jobless claims data were positive and caused a rally in stocks. The following day, a disappointing employment report sent stocks back down.
The Labor Department reported Friday that monthly employment gains totaled 235,000, far below expectations and a decline of 800,000 from July. Jobs growth in the leisure and hospitality sector sputtered, underscoring damage from the Delta variant’s spread.
Regardless, except for a slight dip in the Dow Jones Industrial Average, U.S. and international stocks posted gains for the week (see table).
Shoring up equities are strong corporate earnings growth and low interest rates. Friday’s underwhelming employment report paradoxically can be seen as a positive, because it’s likely to delay the implementation of tapering. Fed Chair Jerome Powell remains committed to dovish policy. When the central bank’s asset purchases start to wind down, we’re likely to experience “taper lite.”
Smart investors prefer to make money in both bull and bear markets, and during all the swings in between. Options are among the best tools to capitalize on volatility. Options offer ways to capture short-term moves in a stock while limiting your downside risk. Options let you make money regardless of the market’s direction.
Options traders love volatility, but for average buy-and-hold investors, it heightens anxiety. If you’re looking to leverage the market’s gyrations in the coming weeks, but you’re also risk-averse, consider the trading methodologies of our colleague Jim Fink.
A world-renowned options expert, Jim Fink is chief investment strategist of our premium trading service, Velocity Trader.
Jim has developed four proprietary stock filters that provide advanced knowledge of when a stock price is about to rapidly accelerate. Based on this “secret” knowledge, Jim constructs trades that have consistently reaped windfalls for his followers. Jim doesn’t trade stocks. He trades velocity.
Want to learn about Jim Fink’s next trades? Click here now.