Key Takeaways
- Another Rough Week for Stocks
- Netflix and Tesla to Report this Week
- VIX Implying More Volatile Trading
That was a famous line from the movie, Wall St. While many things about that movie were fictionalized, that line was pretty spot on. It was another rough week for stocks last week. While the S&P 500 was down around 1.5% and the Nasdaq 100 was off 3%, the actual volatility was much greater than that. After a rough first three days, markets staged a massive turnaround Thursday, only to give up those gains on Friday. And that volatility may pick up in the coming weeks as companies report third quarter earnings.
Heading into earnings season, the S&P 500 is down 24% on the year while the Nasdaq 100 is off nearly 33%. Since rebounding over the summer, both the S&P and Nasdaq have traded lower in seven of the last nine weeks. Fears of a recession are growing. Economic data last week showed stubbornly high inflation continues, which will likely result in the Federal Reserve continuing its aggressive approach to raising interest rates. As it stands now, there is a 98% chance the Fed will raise rates another seventy five basis points when they meet the first week of November.
This week brings a taste of earnings as sixty six of the five hundred companies in the S&P 500 will report. Bank of America
BAC
IBM
NFLX
AAPL
MSFT
There is a lot of talk about bear markets at the moment. As a trader, I’ve never been too concerned with whether it’s a bull or bear market. I’ve always been more focused on what opportunities exist. However, it is worth noting that when markets are down a bit, like they are this year, it is not uncommon to see big rallies like we saw last Thursday. But like we also saw, those rallies can be very short-lived.
For newer investors or those unfamiliar, the VIX is an index which is used to express an annualized expected move for the S&P 500. We call that, implied volatility and it is derived from S&P 500 option prices. Historically, the average on the VIX is around 16%, meaning markets are generally expected to be somewhere between up or down 16% for the year. In reality, markets tend to close within a smaller range at year’s end. We call that, realized volatility. In other words, what the market expects is usually more than what actually happens when all is said and done. However, while the actual closing prices for the market a year later are usually less than implied, that doesn’t mean the moves in the interim can’t be substantial.
Here is a little trader hack. When VIX is trading at 16, that translates into a one day expected move of 1%. Right now, VIX is trading at 32, or double its average. That means there is an expectation for the S&P 500 to close up or down as much as 2% on the day. We saw a demonstration of that expectation last Thursday. Because most options being traded are shorter than one year, the daily expected ranges tend to be a bit more reliable than the expectations a year from now, something investors should keep in mind. Also, with earnings season picking, midterms coming up and uncertainty increasing, we may well be in for more wild swings. That is why I tend to close these pieces talking about sticking with your investing plan and time horizon.
There are some things we can control and some things we can’t. But remaining mechanical in our approach to markets can alleviate some anxiety and keep us from making emotional (a nice way of saying, irrational) decisions. I’ve traded through the 1987 crash, tech bubble meltdown of 2000, housing crisis of 2008 and Covid crash, yet I’m still here trading. Staying mechanical and remaining focused is how you get through a challenging market. Like I’ve said, there are a lot of stocks with significantly lower valuations. For longer term investors looking to take new or add to existing positions, this might be an opportunity. For shorter term option traders, a highly volatile market is full of opportunity. But most importantly, try avoiding allowing your emotions to dictate your investments, especially in a market that moves around like this one.
tastytrade, Inc. commentary for educational purposes only.
Read More: Don’t Get Emotional About Stocks, It Clouds Your Judgement