More Good Omens for Stock Investors

From Baltimore – Last week, I explained why stock investors have good reason to be optimistic in today’s market.

Compared with the market just a few months (or even a year) ago, today’s stock market, many market indicators suggest, is on better footing than it once was. And that’s in spite of the economic turmoil unleashed by COVID-19.

The most obvious reasons for this? A bit of helicopter parenting by the Federal Reserve coupled with a round of corporate loans and bailouts. Together, these actions have buoyed the stock market and have gradually calmed investor fears in recent months.

Case in point is market volatility – a widely held indicator of investor uncertainty. It has fallen substantially (about 70%) since peaking back in mid-March. It’s pretty dramatic…

Even so, volatility still remains above its historical average.

Over the past five years, the daily CBOE Volatility Index (VIX) has averaged about 17, generally fluctuating within the range of 8 to 26.

Today, the index has settled around 25 – very close to the upper limit of that range.

But we’re not in nearly as much trouble as investors were back in March of this year (when the VIX spiked above 80, as you can see in the above chart). And we’re in a better position still than in October of 2008, when the VIX recorded the highest level ever reached: 89.53.

In other words, with the VIX in a relatively normal range – even if near the upper limit – it’s not time to panic. Far from it, in fact.

Volatility has an interesting relationship with stock market returns. Historically, low volatility tends to precede low rates of return, while large spikes in the VIX have been a good sign for future returns.

You can see that pattern in this chart…

Clearly, bigger volatility spikes often signal bigger returns for stocks in the months that follow. And the fact that the VIX is still currently higher than average suggests we should continue to expect significant gains over the next several months to a year.

Of course, volatility is a double-edged sword.

For investors, a volatile market may increase potential downside risk – especially for folks who lack trading discipline and an appropriate stop-loss policy. But volatility can also offer traders more opportunities to profit from strong upside market moves.

For instance, options traders are uniquely positioned to benefit from volatile markets. Since options prices are calculated, in part, based on market volatility, higher volatility often translates into higher premiums and potentially higher returns.

So while volatility has made many investors anxious, it’s also created one of the most exciting periods in the market.

For example, over the past five years, the average daily market move was just 0.04%. That’s comparable to an annualized rate of 15.7%.

But over the past 90 days, the average daily move was 0.17%, which is comparable to an annualized rate of 86% – or more than 400% the market’s five-year average.

In short, today’s market volatility may be down from earlier in the year, but it still serves as an opportunity for investors to capture higher-than-average returns.

And when we combine this with the data I provided last week, we can easily make a case for actively being in the market rather than sitting on the sidelines.

But don’t just take my word for it.

Take Bryan Bottarelli’s War Room track record.

Before the worst market crash since 1929, Bryan made a promise to his readers to give them 252 winning trades in 12 months.

He did it in eight.

And when the market crashed – and investors everywhere were losing thousands of dollars – Bryan gave his readers an average of one winning trade every single day, with a total of 66 out of 68 trades being profitable.

In fact, he calls this his best trading year ever. And in a volatile market like this… not many people could say that.

But he’s not finished yet. He’s made another promise: 300 winning trades to his War Room readers this year. A bold prediction, but I’m willing to take his word for it.

If you’d like to join the frenzy, just click here to learn everything you need to know.

Good investing,

Anthony