Market Volatility – How to Keep Calm and Invest On


If you are watching CNBC, Fox business news, or Bloomberg TV all day, most likely, high on the list of your concerns is worrying about stock market volatility. Many of our most vocal clients and prospects tend to contact us more often when they “feel” higher volatility in the markets or hear about it on the news channels.  We are going to spend this video discussing volatility and the difference between what investors may be feeling emotionally, and what is actually happening in the markets.  When the talk of volatility comes on the TV news networks, I like to go back to a quote from the movie “Princess Bride”.  Inconceivable, as Ingo Montoya said, you keep using that word, I do not think it means what you think it means.” I find that most commentators on TV use the word “volatility” in this way.

Before we get into this week’s topic, “volatility, yes it’s been collapsing in its normal cyclical way, inconceivable to many”, please take a moment to click on the subscribe button and click on the notification bell so you will be alerted when our team uploads our latest content. We do have a new location for our Oak Harvest Investment oriented content.  You can find it by typing “Stock Talk with Chris” in the Google search window or going to the Oak Harvest You Tube channel and clicking on the drop-down tab labelled “channels” and clicking on “Stock talk with Chris”.

We’ve previously discussed many ways to measure market volatility or many indexes that try to track market volatility.   We have discussed the difference between realized volatility and implied volatility in the past.  Measures of implied volatility we have discussed previously include the MOVE Index, which is a Bank of America index that measures Treasury bond market volatility.  We like to follow this index as a measure of stress in the collateral markets. Why? Because if the “safest” and most liquid collateral in the world, US Treasury’s are trending higher, it forces leveraged players to sell assets, whether they want to or not.

We have discussed the spot VIX index many times over the last few years in our educational videos.  This calculation is widely quoted on TV as a measure of stock market volatility.  Remember viewers, that it is a calculation only.  A calculation of implied stock volatility.  It is NOT, I repeat NOT a tradeable index.  It is not realized volatility. While it is one of the most widely recognized measures of stock market volatility, it is not tradeable and is not predictive of future stock market moves.  It is a calculation derived from quoted prices on S&P 500 index options, both puts and calls.  It isn’t even calculated based on actual real time trading data! It’s the average of the bid and ask quotes whether securities trade at those levels or not.

Recently, due to the increased popularity amongst retail investors in trading 1 to zero day options around news events, the marketing department at the CBOE launched a one day CBOE volatility index, the VIX1D index. I won’t get into how it’s calculated but suffice it to say, the team at OHFG recommends that almost no one speculates in these types of instruments.

So, what’s someone who’s watching the financial news networks supposed to do when most of the financial commentators on TV start talking about high market volatility?  Ignore it.  Or turn off the TV.  Why do I say this, because viewers, most of the data these financial experts tout is NOT predictive or useful in determining market volatility or the direction of future stock prices.  How can it be predictive when it’s not even using actual trades, it’s just using the average of quotes?

Viewers, as much as the TV financial hosts want to talk about market volatility being high.  They are wrong and making things up.  Here’s the weekly chart of the 2-month forward volatility futures contract.  This is actually tradeable in the real markets.  This is what market participants really think and put their money at risk about what direction and what level volatility will be in the future.

As one can see throughout the middle of 2022, forward volatility never exceeded 32.5 for virtually any time period.  It stayed above that level for hours at most.  Every time it got to that level and price, market participants came in and bought back their volatility hedges, culminating in the final peak at 32 in mid-October 2022 just as the S&P 500 bottomed out the week of 10/14. Here’s the chart of the S&P 500.

No, I am not a chartered financial technician but I cannot find an example of this pattern for the last 20 years that was not bullish.  Once again my magic number on the cash S&P500 is a monthly close above 4125-30 and monthly closes on the NASDAQ composite cash above 12000-12100.  Here’s a shorter-term daily chart of the 2-month vol future.

This daily chart of forward implied volatility is down and to the right in a stair step fashion.  This is historically bullish for equities as lower trending volatility has historically correlated with rising stock prices as investors feel more comfortable taking on risk as the range of outcomes narrows.  Does this mean that the rest of 2023 will be a straight line up? No.  And while forward volatility positioning and vol curves argue for a strong may and early June, which we laid out last December in our first half 2023 forecast, they also portend  a very normal late summer sell-off.

And I’m going to close this podcast by showing you a chart of daily realized volatility.  This is what the markets are actually doing.  Not what your are feeling when you watch the TV or your screens or what the options traders are pricing in.  This is actually the math behind market volatility that is happening.  As you will see market volatility rose throughout 2022 into June as inflation was ramping higher and the FED accelerating their hawkish rhetoric.

However, since then, the trend in realized market volatility has been. Down.  Not flat or up as many on TV would lead you to believe, but down and to the right.  Lower highs and lower lows. We are now quickly approaching realized volatility levels that existed premarket sell off in 2022 and pre Fed interest rate increases.  If you want a reason why your portfolio is likely recovering even when the newsletter writers and TV anchors are pitching fear and market collapses, look no further than this chart.  Realized volatility has been declining, and viewers, that is bullish for your stocks.

Viewers, when the talking heads on TV start talking about volatility in the markets and get your emotions and anxiety juiced up in a negative way try as much as you can to walk away and take a deep breath.  When it comes to asset allocation changes, most of the time the best action is no action during times of high volatility.  The best time to make changes to your asset allocation is when your emotions are low and market volatility is as well.

Viewers, there is no perfect investment philosophy, there is no perfect trading tool, that is all weather, outperforming every stock cycle or in every economic environment.

At Oak Harvest, we have many tools that our advisors use to help our clients meet their retirement goals and objectives. These tools are both market based and insurance based, that we can use to meet your retirement goals. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at ######## and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.