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Stock Market: Why You Should Prepare for a Jump in Volatility

This volatility indicator “has made a series of higher lows” – and it’s not a good sign

by Bob Stokes
Updated: January 20, 2021

Stock market volatility is like a roller-coaster ride -- extreme ups and downs.

However, unlike thrill-seeking roller-coaster riders who often rise from their seats after the ride with a smile, investors often exit with a frown.

That's because extreme volatility after a stock rally often ends with prices much lower.

Having said that, many investors -- even professionals -- do not anticipate a jump in volatility right now.

Indeed, the San Diego Union-Tribune asked the senior principal of a financial advisory firm on Jan. 15:

Will 2021 be a volatile year for the stock market?

He replied:

NO: If 2020 had not been a volatile stock year -- what with the pandemic, recession, elections, and riots -- then it is reasonable to expect that 2021 should be relatively stable.

Yet, a key stock market indicator is revealing.

Here are insights from our Jan. 15 U.S. Short Term Update:

VolatilityJump

The chart shows the DJIA in the top graph and the CBOE Volatility Index (VIX) in the bottom graph. We've inverted the scale of the VIX so it aligns with stock prices. This index measures investors' expectations for market volatility for the coming 30 days. Most of the time, the VIX trends and reverses with stocks. When the behavior changes, it's time to watch both stocks and the VIX closely. The most recent intraday low in the VIX occurred at 19.51 on November 27. Since then, the DJIA has made a series of higher highs while the VIX has made a series of higher lows. This divergence is denoted with a red trendline on the chart.

Our Jan. 15 U.S. Short Term Update goes on to describe a "clue" in spotting when volatility might start to spike.

Moreover, subscribers are provided with the Elliott wave labeling of the DJIA, which provides even more precision in ascertaining when to expect a change of character in the market.

Review the Jan. 15 U.S. Short Term Update as part of our flagship investor package now to get the details you need to know. Follow the link below to get started.

Have You Analyzed the Current Zeal for Stocks? We Have.

Here's what the January 15 U.S. Short Term Update said:

Aspects of the current mania for stocks [includes] the rush into SPACs, which are IPOs that raise money but haven't identified where they intend to put it, to the use of leverage and margin to buy stocks, to investor call buying, which is setting all-time records. Bloomberg reports [Jan. 14] on another mania-era feature that is making a comeback: the dash into penny stocks. [emphasis added]

Stock market prices might continue to march higher.

On the other hand, financial history shows that extremes in pessimism and optimism often precede major turns.

Elliott wave analysis can help you prepare for the next big stock market turn.

Get the financial insights you need to know by following the link below.

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