With the SPX 500 near a new high we would expect to see volatility muted. That is definitely the truth with the VIX hovering near 13%. Yet many stocks have been in correction territory, mostly those high beta names that reside in the Nasdaq and Russell 2000. Strikingly, the Nasdaq volatility (VXN) has seen a sharp rise upward over the last couple months. But what if volatility starts to rise? Can we protect ourselves from losses?
Now, there is usually not much of a separation between the two fear indices, but the spread has been wide, showing the strong divergence in equity risk. In fact, the spread was an unprecedented 33% (VXN @ 21, VIX @ 14).
What Did That Represent?
Basically an aversion to risk, growth and equities with high beta. Anything that was bought up in 2013 was shot down in 2014. Social media stocks, hot biotech’s, select technology names, industrials, durables, commodities and emerging markets were blasted, and it continues today.
What has been served up by buyers? Stocks you don’t normally see leading the markets, such as energy, utilities and consumer staples. High paying dividend names have been seeing demand as an alternative to fixed income. Bonds have also seen interest from risk averse investors.
There is nothing normal about the action in this market, but we’ve known that for quite some time. Central bank liquidity has been the most unconventional move to recover from the financial crisis. After some time there has to be some confidence and less fear to invest in markets. While we may have some ups and downs over the horizon we should take heed when volatility rises, and take steps to protect our portfolios.
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Learn more about Lang’s work at Explosive Options.
