The Return of Volatility
The Return of Volatility
Market gyrations have finally returned and it threw the market for a tailspin. The DOW experienced 1,000+ point swings earlier in the week, which is something it hasn’t experienced in a long time. As I mentioned in The Inflation Conundrum, fears of inflation and interest rates rising faster than expected were the catalyst that started all the recent mayhem in the market. What we are beginning to witness, folks, is a regime change in stock market volatility.
Take a look at the VIX chart below, which is a widely used index to measure implied volatility in the markets.
The VIX spiked to levels not seen since 2015. During this period of unusually low volatility, investment bankers (every god damn time!) didn’t hesitate to capitalize on this opportunity. It is estimated that around $8 billion worth of volatility-linked products were created during this bull run. That obviously didn’t end well this week as owners of these assets continued to watch prices plummet in a dramatic fashion. Check out the chart below showing the change in asset flows of some of the most popular short-volatility ETFs from Jan. 31 to Feb 6.
As you may know, I’m not a huge fan of ETFs, which I mention here. As central banks take their foot off the gas and rates rise from historically low levels, there will be no more hand-holding for investors. Stocks and other risk assets were artificially bid up due to central banks pushing down bond yields to historic lows. Monetary policy forced investors to put their money into any asset that could at least earn their cost of capital. But that’s all changing. Assets need to reprice and undergo price discovery in a regime without extensive government intervention. What we witnessed this past week was the beginning of a re-adjustment period. The market will inevitably hit some air pockets as it flushes out some of the risky behavior that occurred during one of the longest bull runs in history. This is all a natural phenomenon and I think it’s good for the market. It’s even better for individual stock-pickers.
Volatility Creates Opportunity
The best thing about volatility is that it creates opportunities for stock-pickers like myself. It’s tough to generate any alpha when the whole market just keeps grinding higher. This is why hedge funds have been getting flushed out during this lengthy bull run. There were simply too many hunters and not enough deer to hunt. As those dynamics shift, its time to get off my ass and start hunting!
With the recent sell-off, opportunities are already starting to crop up. Here’s a few names currently on my radar.
I have an interest in making an investment in each of these ideas, permitted the stock price hits my buy range. Most of these companies will report earnings later in February so I would like to see the latest numbers before making a move. I’ll be sure to write a research report on any stock I actually plan on buying.
If you have any recommended stocks you’re looking at please feel free to share in the comments below!