How to Profit as Stocks Swoon
The most widely watched Fed meeting of the year this week appeared to disappoint investors. They sold stocks with both hands Wednesday afternoon after the Fed’s rate cut announcement.
The Dow tumbled over 300 points in the process.
But wait, on second thought, maybe the Fed’s doing the right thing. After thinking about it overnight, that was the conclusion on Wall Street just a day later, with the Dow surging 285 points higher through midday Thursday.
That is until Trump tweeted “no deal” on trade talks with China.
But we’ll cover this latest monkey wrench next week. As for the markets’ Fed reaction…
It’s turning into a case of…
Which Way Did They (Markets) Go?
As I warned in a recent Wealth Watch article: “markets could become a lot more turbulent heading into the fall.”
So buckle up!
And that’s exactly what happened this week, with sharp spikes both down and up. The volatile action comes after a long absence of such large moves, which is telling.
In fact, it had been nearly two months since the S&P 500 index moved up or down more than 1% in a day. This week we had two 1%-plus moves on back-to-back days.
Two Major Concerns
Looking back at market history, there are two things you need to be concerned about right now.
First, whenever volatility spikes higher after a long spell of low volatility, it’s bearish for stocks.
Second, the investment calendar turns unfavorable for investors over the next two months, as you can see above.
In the past when volatility wakes up after a long nap, markets continue to stay volatile.
The CBOE Volatility Index (VIX) has historically jumped an average of 20% over the next two months.
Not surprisingly, stocks tend to underperform over the next two months as well, posting losses about 40% of the time.
This is a trend with massive amounts of data backing it. In fact, over the past 70 years August and September have proven to be the only two months of the year when the S&P 500 posts average declines.
How to Hedge Against Rising Volatility
What’s an investor to do with volatility on the rise and stock market seasonality turning hostile?
Consider adding a hedge to your long-investment portfolio that’s designed to profit directly from rising stock market volatility.
For example, the iPath S&P 500 VIX Short-Term Futures ETN (VXX) is a fund designed to gain value as volatility rises.
Another 20%-plus rise in the VIX as we’ve witnessed before should translate into a 15–20% gains in VXX.
And that will make you feel all the more secure ahead of the market’s most volatile period of the year.
Here’s to growing your wealth,
Chief Income Expert