The North American stock markets continue their roller coaster ride with the indexes rising early last week, only to be followed by another sell off at the end of the week. Investors are being forced to deal with volatility that they rarely had to deal with in the past. The VIX (volatility index) rose sharply on some days and then fell sharply on days where the market rallied. Why is the volatility in the markets so high and how can investors protect themselves against it?
In my opinion, the first thing investors need to realize is that volatility is here to stay. Today we have more flash traders, high frequency traders, derivatives traders than we ever had before. There are many traders setting up computer programs designed to sell or buy when the market reaches certain technical levels. Thus, all that is needed is a spark to move the markets one way or the other and touch on a technical point that most traders are watching and boom! A cascade of trades are triggered, taking the market down or up in seconds.
In my belief, this is one of the reasons why we experienced the huge sell off a few weeks ago. The spark can come from anywhere, such as geopolitical events, government initiatives or environment issues as an example. Thus to be an investor today, you must be on top of any global event that can affect your portfolio.
More and more investors are looking to technical analysis to predict where the stock market is headed. This also seems to cause a lot of volatility because everyone knows and uses the same technical levels (e.g. 200 day moving average). Therefore, when a technical level is broken -- for example to the downside -- you get a lot of selling pressure on that index. In my opinion, investment-specific or fundamental analysis on a particular company is still important to investors. However, no matter how well that particular company has done lately, if the overall market breaks through a resistance point to the downside, it doesn’t matter how good the fundamentals may be. There is a good chance the share price will fall with the overall market.
I believe we are still in the midst of a bull market run. I feel individual investors will finish the year higher than where they started. However, I also believe that due to the increased volatility, the market's growth at times will leave investors doubting the move higher. At times, they may have to be shown that, yes, they are still making money.
The reason for this is because in other market rallies, you had the market rise one day by 50 points, the next day by 50 points to perhaps be followed by a down day of 25 points. I believe today’s market is different. You may have an increase of 100 points, two days in a row followed by a down day of 125 points. The net growth on the index is still the same, only the peaks and valleys are much greater. The market is very strong, but the setbacks along the way are a lot more pronounced than in previous bull markets.
So with this heightened volatility, what should investors be doing to protect themselves? I believe that today, more than ever, individuals need to have a diversified portfolio. They need to look at types of investments that are not in the market (e.g. bonds) to protect their assets. If you are looking for growth in this market, you want to buy the dips and sell the rallies once your targets are met. I believe you want to own large “blue chip” investments that pay good dividends. These are the investments that can best withstand this volatility while allowing you to stay in the market. One thing I do know from history is that the best days in the stock market often come right after the worst. Thus, if you panic and pull your money out, you will miss the good times even though you have experienced the bad times already.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at firstname.lastname@example.org. I will be glad to speak with you!
– Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities.