Stock Traders: Beware of Volatility This Month

U.S. stocks returned to record levels last week, capping off Wall Street’s best August in four years. Despite the gains, some investors are fearing an imminent blow back heading into a historically weak period for markets.

August: Defying the Odds

August was a record-setting month for Wall Street, with the S&P 500 Index and Nasdaq Composite Index hitting new all-time highs. It was the S&P 500’s first record rally since January, putting an end to the longest correction in a decade. The S&P 500 returned 3% in August, defying a historic downtrend during the month.

The technology-focused Nasdaq advanced 5.7% last month, its biggest August rally since 2000.

September: Historically Volatile

If history is any indication, Wall Street is entering its most volatile month of the year. September is by far the worst month for the S&P 500. The following chart, courtesy of The Wall Street Journal, documents the index’s average return between 1945 and 2018:

The historic precedent isn’t the only reason why investors are worried about the post-Labor Day market. As WSJ reports, global fund managers are holding larger than average levels of cash in their portfolios and sectors with high dividend payouts, such as utilities and real estate, are beginning to recover. These sectors have significantly under-performed amid the bull market.

At the same time, major banks such as Morgan Stanley and RBC Capital Markets are warning against holding technology stocks, the market’s best-performing group.

Monetary policy, trade talks and geopolitical tensions are also back in the limelight this month as investors return from summer holiday. Each factor carries its own set of risks.

What Does the VIX Say?

The Chicago Board Options Exchange (CBOE) Volatility Index, also known as the VIX, is the market’s preferred measure of investor anxiety. The so-called “fear index” trades in the opposite direction of the S&P 500 Index roughly three-quarters of the time, making it a fairly reliable barometer of stock-market health. VIX trades on a scale of 1-100, where 20 represents the historic average.

Stocks’ return to record highs has not been met with a commensurate decline in volatility. VIX bottomed at 10.85 last month but has since returned to the 12-13 range. At the height of the Trump rally, VIX averaged single digits.

The indicator declined 5% on Friday to close at 12.86. For the week, it rose 7.3%, pushing the relative strength index (RSI) back above 50. A look at price-action indicators suggest VIX is still in a firm downtrend, but the picture could quickly change amid seasonal influences.

Volatility spiked 115% in early February, which led to the death of a popular inverse volatility product known as the XIV. Credit Suisse pulled the plug on the VelocityShares Daily Inverse VIX Short-term exchange-traded note (XIV) on Feb. 20 after booking nearly $1.9 billion in losses.

Featured image courtesy of Shutterstock.

Chief Editor to and Contributor to, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi