Daily Update: Get Used To Volatility

Maybe you thought today was a bit of a rollercoaster. The S&P 500 spun in a 2.2% circle, while the VIX or “fear index” remains elevated by historical standards . . . but for a lot of traders, this is now business as usual.

After all, while it can be unnerving when the Dow shifts 700-1000 points, that’s only 2-3 percentage points. Individually, each is more tremor than earthquake. And since half the tremors tend to take stocks up, we tend to laugh off a lot of volatility at that level.

The problem comes when those tremors continue day after day for weeks and months. Human beings aren’t equipped to deal with sudden shocks at that level of frequency. You can never unplug from the market when you know how fast the wrong combination of 2% tremors can turn into a full-fledged bear market.

Human beings get tired. We get frustrated. We start second guessing every decision and doubting every conviction that built our portfolios.

And when we’re in that frame of mind, the shocks that we would ordinarily laugh off feel a lot more intense. I think that’s where the market is right now. For a lot of people, it only takes a 2.2% lurch to trigger flashbacks to all the turmoil we’ve endured so far this year.

In other words, it isn’t the crash that breaks your spirit. It’s the slow descent from cruising altitude . . . the suspense.

Take today’s 2.2% journey to the downside as an example. After last week’s 9% rebound, an isolated step back is not only natural but healthy. We need the bulls to catch their breath and clear their heads before any further upside will feel convincing.

In that context, today was a correction. Corrections are normal, artifacts of statistics more than sentiment. If you read today’s chainsaw chart as just another data point, I salute you.

But for a lot of traders, the reminder that volatility cuts both ways (down as well as up) reopened psychic wounds that last week only started to heal. I ran the numbers and 2.2% volatility was only an average day for the S&P 500 last month.

The market remains unsettled. Time to bury hope that things will get quiet any time soon. By my math, it’s going to take an extreme and sustained drop on the VIX before that happens . . . something on the order of the fear index plunging below 5 and staying there through the end of the year.

In that scenario, the sudden silence will probably start feeling scary fast. And when traders get scared, we all tend to act a little more erratically. The VIX goes back up.

Instead, I’m looking for volatility to recede gradually over the course of months. We need to get used to this. For generations, traders built up enough psychic muscle to weather the shocks.

Market conditions right now are not “normal.” Intraday volatility has been statistically elevated all year . . . and May was only a little wilder than January. Traders who survived January and came back smiling should have been able to handle May, but the months in the middle didn’t leave a lot of space for anyone to catch their breath.

That’s why people are tired. If you’re tired of the market, you can take a break any time of year. Recharge. Come back refreshed.

But if you find this market environment invigorating, you’re in good company. May was volatile, but more than half the trading days ended with a gain for the S&P 500.

The market as a whole basically moved in a circle last month. And those who are familiar with my work on Wall Street know that I greet every sideways market as a fresh opportunity to play the swings.

Buy the dips. Sell the peaks. Repeat. Apply the system to your favorite stocks or to the market as a whole . . . but keep money working.