This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Volatility Is Dangerous for the Markets

A suggested way to look at volatility is through the ratio of implied volatility to historical (realized) volatility. The next chart shows the level of the S&P 500 index on the left scale and the ratio of VIX to the rolling 12 months of volatility on the right scale (the ratio of IV/HV or Implied Volatility divided by the Historic Volatility).

I can discern three periods here: From 1999 to 2002, the market went down, while the ratio stayed in the same range; then from 2002 to 2007, the market is going up, while the ratio is going up as well, and then from 2008 to now, the market is going up, while the ratio has huge swings.

In other words, during this third period, the volatility (or the dispersion of highs and lows) of the IV/HV ratio is increasingly high.

The swings are large and that does not bode well for the market. What this last period is telling me is that although the market has been going up, investors are highly skittish and nervous. Clearly, this does not tell us what the market or what the volatility will be next year, but it does confirm what everyone is thinking -- that our economic and market future is shaky.

A prudent investor should be conservative and allocate less to risky assets and more to alternative strategies, which are non-correlated to the major market indices.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
3 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $113.29 0.00%
FB $91.01 0.00%
GOOG $630.38 0.00%
TSLA $248.48 0.00%
YHOO $33.14 0.00%

Markets

Chart of I:DJI
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 +1.21 0.06%
NASDAQ 4,828.3250 +15.6170 0.32%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs