Back in 1978, the “Attack of the Killer Tomatoes” was released, a spoof of low-budget sci-fi films –  oozing tomatoes go on the rampage, splattering innocent victims.  It seems the VIX (volatility index) is doing the same sort of destruction.

So far in 2015 volatility has been the big winner, and there doesn’t seem to be an end in sight. Higher volatility is not a problem; in fact it presents some great opportunities in the short run.  However, if market volatility starts trending higher, it could create a shift in sentiment and mindset.

Is a shift in sentiment a problem?  Well, it could be. Based on the current cycle of the market (it’s quite long and extended), there could be a prolonged correction that takes back many of the gains achieved since 2009. 

Now, I’m not saying we are heading toward a bear market, or even back to certain levels from recent years.  The markets have been on an impressive run, and with continued Fed accommodation, there is no reason for that not to continue.  Further, strong economic growth is happening.  But, more importantly, there are clues we could see more growth over the next few quarters.

The Killer VIX

As market players, we have feasted on declining volatility, nearly in a straight line since Jan 2012.  The VIX has been on a wild ride and appears to have shifted higher, as the futures expected volatility is on the rise.

So, don’t be surprised to see more big reversals, such as we saw this week. Tuesday, January 13, saw the SPX 500 trade within 50 handles.  Further, we’ll see more triple-digit moves on the Dow as well, (up and down some 400 handles on Tuesday as well).

As a result, the risk appetite has been strong.  Markets showed robust gains in ’13 and ’14, and many think that feat cannot be repeated.  I’m not so sure it cannot be done again. The probabilities are not favorable, yet the conditions are such that markets can rise.  The only fly in the ointment might be energy and financials, which may drag earnings growth due to conditions that may eat into their margins.

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