While the recent increase in volatility has resulted in some wild trading swings, the S&P 500 is down just over 2% from its closing high.
A pullback of this small magnitude is typically not met with such angst, but fears that the Federal Reserve will make a premature move and uncertainty over the election have added to investor panic.
After trading in one of narrowest ranges in decades for over a month, the odds of a big move were inevitable. It’s why we saw a sell-off last Friday, and it’s why I expect volatility to continue to spike over the next few weeks.
After spiking on September 9, the VIX (commonly known as the volatility or fear index) has been gyrating all over the place this week, showing the uncertainty in investors.
Typically, the longer a market trades in a narrow range, the bigger the breakout afterward. So while it felt ugly at the time, Friday’s major move is likely a sign of good things to come.
With several Federal Reserve talking heads confusing investors more than they already were, I can completely understand why some folks on Wall Street are feeling a bit hesitant. Still, I continue to believe that ultimately the next big move will be higher, because consolidation in the midst of an uptrend is usually followed by a move in the same direction.
The Good Side of Volatility
I already started to lick my chops in anticipation, as most of the stocks I’ve been watching fell to lower prices. But I didn’t pull the trigger because typically a pullback with large volume will be followed by severe volatility, so the odds of another down day or two were high. It’s smart to wait and see how the market plays out for a few days before buying too aggressively.
Higher prices are certainly on the horizon, but I don’t expect volatility to slow down anytime soon. Between the upcoming Fed meeting on September 21, early third-quarter earnings in October and the election still looming in early November, there are a lot of factors bustling to keep investors on their guard.
While volatility can impact your approach to trading, it’s not necessarily a bad thing for the market. In fact, it opens up a lot of opportunities that could help your portfolio’s performance in the long run.
Resilience and patience will be key in the coming months, and the best way to play the volatility is to buy into weakness in preparation for higher prices come next year.
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks and the ETF Bulletin. Earlier this year, Matt and Hilary Kramer teamed up on Breakout Stocks where Matt serves as the Co-Editor. Most recently, Matt and Hilary joined forces again. This time, they are helping individual investors make money trading ETFs. For more on their latest project, visit www.etfedgesummit.com.
