be_ixf;ym_202104 d_12; ct_50

Select Page

Volatility Shows Stocks Might Be Rallying Like It’s 1985

Volatility Shows Stocks Might Be Rallying Like It’s 1985

Despite frequent tweets in recent weeks that sent stocks reeling, overall market volatility has declined to a 10-year low. That means something for stocks, but volatility is one of the least understood ideas in the market.

Most analysts treat volatility like they’re fearful roller coaster riders. You only hear screaming when the roller coaster is falling, and we usually only hear about volatility when stocks are falling. If you ever rode a roller coaster, you know the uphill climb is exciting, with passengers quietly awaiting the downturn they know is coming.

This happens in the stock market, too. Investors always seem to “know” that a crash will follow an uptrend. They look for signs of the downturn, and low volatility is frequently called a warning sign. In the past few weeks, low volatility has led to the appearance of the bears, but as the charts below show, the bears could be wrong…

Market volatility, shown in the chart as a blue line, is falling and is now at a 10-year low. Volatility is calculated as the average range of typical market action over the past 26 weeks. The green line marks the Dow’s 520-week low.

 

djiadaily

 

There aren’t many precedents for the current market, but 1985 comes close.

 

djiadaily1985

 

In 1985, stocks had been rallying since Ronald Reagan’s re-election, and volatility collapsed to a 10-year low. In this case, low volatility preceded a gain of nearly 100% over the next couple of years.

Eventually, 32 months later, the bears were right, and the market did crash in October 1987. Investors selling out in 1985 because of low volatility missed a chance to double their money.

While low volatility is widely believed to be a sell signal, it’s really just forecasting that a big move is about to begin. That move can be up or down.

Right now, the weight of the evidence is telling us to expect that move to be higher as earnings improve and economic growth accelerates. A crash is likely at some point, but the crash could be years away.

Regards,

Michael Carr, CMT

Newsletter Sign Up

Sponsored

MEET OUR EXPERTS

WHAT READERS ARE SAYING..

“Looks like I have finally found the right person to learn and grow from.”

- James

"You have done once again!! You are reminding me of the GREAT Joe DiMaggio with your consistent hitting!! You knocked this one out of the park!"

- Keith S.

“I found Profits Unlimited in Summer 2016. Starting with about $20,000, I began following your recommendations and did my own thing as well. Four years later, I am happy to report my portfolio is now in the six figures."

- Andrew

Share This