Welcome to our active management update on the market
The recent rally in stocks has been grabbing headlines in the financial news, but that doesn’t mean that it’s all smooth sailing for investors. The following graph shows one of the more widely followed volatility measures, the CBOE Volatility Index (VIX). It measures the volatility of stocks traded in the S&P 500.
There is a zone of stress when readings exceed 25. Even more so when readings exceed 30. I have shaded the zone between 25 and 30. Despite the significant rally in stocks since the March low, markets are still stressed in terms of volatility.
What does this mean? Stocks may be moving higher, but in the eyes of the broad market, significant risk is still present. In other words, complacency is likely not the key to success … as if it ever was.
Yes, stocks are moving higher. Yes, investors should participate. But investors should also have a rule set that allows them to open the exit door if or when positive expectations are not met. This is exactly what we do all day, every day, and under all market conditions here at Flexible Plan.
Based on this graph, the stock market will likely not return to a “normal” supply and demand environment until the VIX declines back to 20 or below.
Until then, we can be thankful we have rules-based strategies and portfolios that recognize this and respond accordingly.