Change can be a good thing; or, as we have all found to our sorrow, it can be a bad thing.
In the stock market, volatility is often a precursor to a change of direction in the market, either up or down.
And oh, man, has volatility been defining this market for the last six months, especially since the debt debacle heated up in the US and Europe late this summer. This really has been the summer of discontent.
The market measurements of volatility represent the price of stock investments. But underneath that measure is the sum-thinking of real people who act and react to real events. They react to debt deals, jobs plans, tax increases- real, imagined and Fantasy Island- the price of milk at Safeway and the price of gas at BP.
And the sum of all that volatility means that the price of stock investments are about to undergo, in my opinion, a radical change in direction from what we have seen in the last ten years. In this context you should see the stock market as a proxy for the economy overall and you should see the economy as a proxy for our society as a whole.
And sandwiched somewhere in there is politics, because politics will never be denied its due. Politics is about to change in a big way too. In fact, it’s the political change that will allow the markets to finally break free again.
I’m going to hit some technical topics regarding investing here but, as I suggested, there is a political point at the end, so bear with me. It might even help you be a better investor.
S&P 500 Volatility Chart 1-year:
What the chart above shows is the S&P 500 Volatility Index for the last year.
Often called the “fear index,” the S&P 500 Volatility Index measures investors’ confidence levels. When confidence is high, the number is lower and when confidence is low, the number is higher. Those numbers tend to be contrary indicators however of market direction.
Let me explain:
I was speaking with a friend who I will call the Most Bullish Man in America (MBMA).
And he’s really, really worried about the market.
His actions- and the actions of people like him- are pushing the fear index higher and that’s a good sign. When bullish folks like my man, MBMA, can see nothing good in equities, that’s about the right time to jump in to stocks. It means that the last bull has been converted to a bear.