By Jeff Clark – the editor of the Jeff Clark Trader
Volatility is exploding higher.
The Volatility Index (VIX) closed Wednesday at its highest level since Christmas Eve, 2018. Stocks are falling. The market is collapsing. And folks are willing to pay huge premiums to buy put options as a hedge against even more downside.
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At times like this, traders need to remember the phrase we’ve repeated often here in the Market Minute…
Periods of low volatility are always followed by periods of high volatility, and vice versa.
It seems like now is a good time for some of that “vice versa.”
Take a look at the following chart of the VIX…
The VIX traded above 33 at one point yesterday. And, the Bollinger Band width (at the bottom of the chart) expanded beyond where it was on Christmas Eve, 2018 – which was arguably the best time over the past year and a half to buy stocks.
The blue arrows point to those times over the past year and a half when the VIX closed above its upper Bollinger Band – indicating an extremely high level of volatility – AND when the Bollinger Band width (at the bottom of the chart) expanded to an extreme level.
Here’s how the S&P 500 performed following each of those occurrences…
On five of the six occasions, the S&P 500 rallied immediately off of oversold conditions. But, even following the one occasion where the market continued lower – last May – stocks recovered and were sharply higher two months later.
Volatility is high right now. The VIX is more than 100% above where it was trading just one week ago.
Now is not the time to be betting on an even further increase in volatility. Traders should be looking for volatility to contract.
That means traders should be looking for stocks to bottom… and start to rally from here.