The Volatility Bubble Has Popped
Wow what a day. Not only did the stock market tank 4% in regular hours, but is currently freefalling after-hours with volatility spiking to one of the highest levels ever.
Investors are currently going crazy, panic selling without discrimination. The media is tripping over themselves trying to keep up and report on these moves.
You’re going to be bombarded with news over the next few days, so I’ll keep it concise.
*The market is still significantly overvalued
Yes I know it’s hard to believe, but as I’ve been saying over a year now the market has exceeded many historical valuation levels: trailing P/E, forward P/E, market cap over GDP, margin debt outstanding.
*Today is not the end of the world
The market will likely recover in the short-term once people stop panic selling across the board. In the meantime this will be one of the best opportunities in your life to enter into value positions. People are selling on emotions rather than logic. This opens up great opportunities for rationale investors. However…
*The market sell-off and increased volatility can continue for a few more days
With margin debt at an all-time high, there will be many people forced out of their long positions due to the recent sell-off. In my opinion today’s crash was partially due to this factor, however I’d expect it to significantly increase over the next few days. Again, a great buying opportunity.
*The volatility bubble has popped
While I’m writing this, the volatility bubble has popped in the after-hours. The XIV, a popular short-volatility ETN, is down 80% in after-hours. This huge crash was preceded by double-digit percentage drops in previous days.
As I’ve mentioned in previous posts, there has been a volatility bubble growing for years. People have become complacent in the market’s continual moves up, that they forgot corrections and crashes do occur.
Volatility’s drastic crash in the after-hours is an overcorrection and a knee-jerk reaction to the market’s fall. People are liquidating their positions in record numbers… Blood is on the street.
No one is touching short volatility with a 10-foot pole. Personally, this is the perfect opportunity to enter into short volatility. Remember that volatility stabilizes over the long-term.
I do not make specific recommendations as every trader needs to understand which investments are best suited for them, however you may want to take note about this volatility crash and determine if it’s an opportunity for your specific needs.
Invest wisely and come out of this more profitable than you went in.