As traders and investors, it is important to understand the current market environment and adjust our strategy accordingly. Are we in a low volatility environment with a steady uptrend in the major stock indexes? Or, are we in a volatile environment with relatively big swings. I think we know the answer to this question.
The chart below shows the S&P 500 with four distinct periods over the last 15 months: two with low volatility and two with high volatility. The indicator window shows the 1-day Rate-of-Change with horizontal lines at +1% and -1%. The green shading highlights two low-volatility periods when the market advanced. Bulls love dull markets! The red shading shows when volatility expanded. Notice that these volatility expansions started with a sharp move lower.
The current market environment turned volatile in mid October and remained relatively volatile into November. The prior high-volatility period lasted around eight weeks. Prior to this, there was seven month period when volatility remained above average form August 2015 to February 2016. Boy was that fun. Not!
Nobody knows how long the current period will last, but volatility is currently above average and we can adjust our strategies accordingly. There are a number of ways to deal with volatility. First, we can raise cash and lower our exposure to equities. Second, we can become more selective and defensive. Third, we can look to diversify away from equities.
Chartists looking to remain active and trade during periods with above-average volatility also need to consider making adjustments. First, traders might consider trying to catch price swings earlier instead of waiting for a bigger breakout. Breakouts are more likely to fail in a volatile environment. Second, traders might consider booking profits earlier. Third, traders might also consider lowering their expectations.
All my posts are just my opinions. I receive no compensation for posts. These posts are for entertainment purposes only. I may be long or short or hold no position.
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