Earlier this week, we discussed what we expected from the economy next year… But what about trading?
For the past year, we’ve been screaming “buy” every time there’s a dip we like.
These dips have often coincided with monthly options expiry, where speculators and market makers alike are forced to rapidly adjust positions.
Those were all calls we could make with confidence, though…
Economic conditions were improving, company revenues were accelerating and government policies were still accommodative.
And the CBOE VIX Volatility Index — the “fear index,” in parlance — reflected as much. That may not be the case, however, when trading volatility in 2022…
Source: Bloomberg
The measure of market uncertainty plummeted from its COVID-19 peaks just about as quickly as it ascended.
And although it spiked periodically thereafter — usually near monthly options expiry dates — those bouts of volatility would resolve, and the index would inevitably head lower.
Trading Volatility in 2022
Over the past month or so, however, that dynamic has changed…
Source: Bloomberg
During that time, the VIX spiked to its highest level since the GameStop Corp. (NYSE: GME) short-squeeze mania back in January and February.
Although levels have pulled back below 20 — where the market tends to be calmer — as of this writing, they have not fallen to prior levels around 14.
For the uninitiated, a reading of 20 means we can expect average market moves of 1% up or down each day over the next month. The higher above 20, the more volatile the market. The lower under 20, the less volatile.
Simple enough…
Currently, our models indicate this the beginning of a new cycle of volatility in 2022. One that should see the VIX return to sustained levels between 20 and 35… like we saw in the latter half of 2020.
The associated choppiness will make stock picking a much more challenging game going forward.
When the data tells us to start thinking about getting defensive… we don’t ask questions — we make adjustments.
To counteract that rise in volatility, and as the first step in trading volatility in 2022, we introduced SPDR Gold Shares (NYSEArca: GLD) to the watchlist.
And for this week’s FREE TRADE, we’re going to introduce another: The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT).
Source: Bloomberg
Bonds aren’t a sexy investment, but they won’t go down if interest rates have peaked here as our data indicates.
And we even get to pick some up on sale.
That’s sexy enough for me.
All the best,
Matt Warder
Fortune Research
