Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

What's The New Norm In The Stock Market When It Seems Normal No Longer Exists?

By Chris VermeulenStock MarketsJun 20, 2021 12:36AM ET
www.investing.com/analysis/whats-the-new-norm-in-the-stock-market-when-it-seems-normal-no-longer-exists-200587109
What's The New Norm In The Stock Market When It Seems Normal No Longer Exists?
By Chris Vermeulen   |  Jun 20, 2021 12:36AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

COVID-19 and the havoc it has created in world economies is unlike anything we have seen before. Yet when we look at the stock market charts they continue to go up.

We have bad jobs data—the markets respond and go up. We have poor CPI—the markets go up. The housing data misses—the markets go up.

It is like bouncing off Teflon. What used to cause rifts in the markets now cause the opposite. In this upside-down world, this has become the norm.

Since Mar. 18, 2020 until now we have had the following gains:

S&P 500 ETF Daily Chart
S&P 500 ETF Daily Chart

So, we ask how in the heck is this happening? How can it be that the markets respond in a positive way to the bad economic news? The continued slow economic recovery. The largest debt this world has ever seen. What on this earth is fueling all this? It took me a while to figure it out, but it is simple.

In short, these markets like the bad news because it forces quantitative easing and keeps interest rates down. This is akin to the Fed hitting the gas on the economy while driving on a sheet of ice.

Most would expect the Fed to proceed with caution, but instead, they are going for broke. So, every time we see bad numbers the markets respond positively, and bad news is good news. We have seen this since the breakdown of the markets in March of 2020 and it has continued.

The problem is that we are creating another bubble and when that finally bursts, we are going to have to move fast and furious. Nobody knows when that will be—next week, next month, or a year from now. All we can do as traders is to be cautious and execute trades that have defined risk.

Take a look at the most recent recession in 2020—where we saw the VIX climb as high as 85. At that price, the market is expecting extreme risk. Ultimately, the VIX is the industry standard to help traders and investors have a standardized view of market risk through implied volatility.

VIX Daily Chart
VIX Daily Chart

The VIX is useful because it can give us a hint at what the market is expecting since it is an example of implied volatility (IV). Typically, IV is derived using an options pricing model, such as the Black–Scholes. Using these models, the theoretical value of an option can help guide us to the measurement of implied volatility at a particular point in time.

Traders and investors can use IV to find attractive options trades to hedge, enter or exit a position, or to speculate on a future outcome in the market.

Historical Volatility

While the VIX is a measure of implied volatility, there are many historical measures of volatility that can be useful. One common example is the beta coefficient. This is a historical calculation measured by taking the returns associated with a security and comparing that with the price action of the market over the same time period.

A security with a beta less than 1 implies that the security is theoretically less volatile than the market as a whole. A security with a beta greater than 1 would be more volatile than the market.

For those that want to have a full picture of the risk of a security, the beta coefficient can help separate market risk with individual security risk. These types of measures can help you diversify properly with respect to your individual risk tolerance.

A historical volatility calculation like beta gives you a basic understanding of what the price of a security has done in the past. While past performance is not indicative of future results, historical volatility calculations can be used to help measure risk and ultimately help determine if a security is right for you.

The Volatility Of The Volatility

To further confuse new traders, there is such a thing called the volatility of the volatility or a.k.a. the VIX of the VIX (VVIX). No this is not an exercise on doublespeak, if you are a reader you would have seen me talk about this before. The VVIX is simply a measure of the change of volatility in the VIX volatility index.

The VVIX is the VIX of the VIX like the VIX is the VIX of stocks. Ok if you are not thoroughly confused by now then congrats because this stuff can get pretty confusing. Another way to put it is, the VVIX measures how rapidly S&P 500 volatility changes, and is thus a measure of the volatility of the index. Investors can use the VVIX and its derivatives to hedge against volatility swings on changes in the VIX options market. You can hedge the hedge!

Why You Shouldn’t Be Afraid Of Volatility

All told, volatility is just a measurement that can give you insight into the potential risk of a security. It’s important to remember that actual volatility is almost always less than implied volatility. No measure of risk is going to be totally accurate, anything can happen in the financial markets. Even so, volatility measurements can offer a clear view of the risk the market expects.

What's The New Norm In The Stock Market When It Seems Normal No Longer Exists?
 

Related Articles

What's The New Norm In The Stock Market When It Seems Normal No Longer Exists?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
Mehmet Dutlu
Mehmet Dutlu Jun 22, 2021 5:15PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
the last part of the article is just a repetition of a previous one.
Vitor Silva da Silveira
Vitor Silva da Silveira Jun 20, 2021 7:49PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
this bubble must be getting every investor scaried. I Hope VIX and VVIX help us to prevent the worst.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email