Archive for the ‘Volatility’ Category
Fear factor volatility
The record-breaking point drop in the Dow Jones Industrial Average (DJIA) yesterday needs to be kept in context. While significant, it is not the largest percentage drop in the index.
The record high level of the volatility index (VIX) also needs to be examined in an appropriate frame of reference. First, the index is relatively new, so the setting of new records should not be unexpected. Second, the markets have been in a downtrend for some time and down-trends are associated with generally higher levels volatility than market up-trends. Why? Because investors are less concerned when all is going well, but become fearful when markets turn against them. A buy and hold strategy looks promising during an up-trend, but nervousness and apprehension take over in a down-trend. Hence the frequent reference in the popular press to the VIX as the “fear gauge”.
Procerity’s Prognosis: Volatility in the markets will decrease once the markets bottom out.