It’s not the first time I’ve written about this type of bull market move. Earlier this year I wrote an article about “the next bull market.”http://www.wyattresearch.com/article/next-bull-market-dont-miss-out-on-it/
But before I go any further, let me give you a simple summary about the VIX and how it works…
The Chicago Board Options Exchange’s Market Volatility Index, or the VIX, measures the implied volatility of the S&P 500 index. It represents investors’ expectations of volatility in the S&P 500 over the next 30 days.
Higher VIX values indicate anticipation of higher stock market volatility, while lower VIX values indicate the expectation for lower stock market volatility.
The stock market tends to “take the stairs up and the elevator down.” And that means higher volatility is usually associated with lower prices.
If investors think equities are going lower, they may think the move will be accompanied by increased volatility. Therefore, the price of the VIX or volatility will go higher.
Basically, 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.”
A low VIX represents a complacency and lack of awareness of possible downside.
It’s kind of like a person foregoing hurricane insurance because there hasn’t been a big storm in a few years.
Historically, when we see extremely low volatility like we’ve seen until this week, a push higher is right around the corner.
That means equities could experience a sharp decline….and that is exactly what is happening right now.
The recent decline in stocks is creating a tremendous opportunity to profit from the higher volatility.
This is why I believe we are entering into a new bull market . . . a bull market in volatility.
As you can see in the chart below, we’ve seen two other instances over the last 24 years where volatility hit all-time lows.
The last time we saw volatility hitting new lows, my trades delivered total gains 363%. The S&P returned 1.38% that year.
The same thing is happening in 2018.
As you can see in the chart below, volatility is back and is here to stay.
While most investors are fearful and losing money, options sellers will be confidently making money and hedging their portfolios simultaneously.
Over the next few weeks I will be discussing the strategies I am using to take advantage of the spike in volatility…stay tuned!