Saturday, September 12, 2015

Market Volatility – What I’m Watching

Normally I wouldn’t be endorsing tactical investing because I personally believe that investing small amounts of money at regular intervals over long periods of time is a superior investment strategy for the majority of people.  However, being informed about current market events does help with maintaining perspective and reduces the likelihood of succumbing to emotionally based investment decisions.  So what is going on with all of this volatility that we are seeing?

There are a few key fundamental factors on the table including a potential slow down in China, worries about the future of the Euro currency and a Fed that is beginning to turn bullish on interest rates.  The main problem with a China slowdown is that many economies around the world have geared themselves towards supplying China with raw materials in order to feed its growth.  If China is perceived as going into recession there could be big losses for these economies as they slowly shift gears towards something else.  The problem with the Euro is if you imagine that you have all of your life savings denominated in Euros and you see story after story about whether the Euro will even exist in ten years…are you going to wait around for that to happen or are you going to move your savings overseas into something safer?  Both of these issues contribute to a higher dollar which is working against the Fed’s increasing desire to raise rates.

Let's talk about some prices.  On the morning of 8/24/15 S&P futures hit a low of 1831 which is an amazing 7% drop from the prior day's close.  Ever since then the market has been creeping higher and higher but has been unable to surpass 2000 for what I'm assuming are psychological or emotional reasons.  In short, the market appears to be in a type of holding pattern waiting for some new news that will help to justify a significant move higher or lower.  The volatility VIX index also remains elevated at a level above 20 indicating that fears about a move lower still persist in the marketplace.

There really is no sure way to tell which direction the market will end up taking so the only real question is what you are going to do when the inevitable move happens.  I have always been a huge fan of keeping a stash of cash available for investment during market panics.  I use this cash to buy more of my favorite funds at discounted prices.  If I'm feeling adventurous I attempt to sell volatility and receive income from those who are panicking.  If you've heard that selling volatility is dangerous then you've heard right but in situations where there is panic selling this strategy is actually a very nice risk adjusted investment.  After all, due to the price discovery mechanism volatility over time is a naturally depreciating asset.  The key here as well as always is to not overdo it.  Smaller investments spread out over time usually perform way better than large one time investments.

Remember to always prepare for volatility before it strikes and you'll be one of those investors looking for bargains rather than one of those losing sleep every night.