A new volatility expansion

And just like that, we have another volatility expansion.

Yesterday, in Global Macro: Volatility expands and divergence between sectors I suggested “It is likely we’ll see a volatility expansion from here.” Indeed, with the VIX and VVIX (volatility of volatility) both up 10% today, we are entering a volatility expansion.

Implied volatility had settled down gradually since it peaked in March, but it now looks like we may see prices spread out into a wider range.

As of this moment, the S&P 500 is down -2.34% and it is reversing down from the average of its price trend year to date, so I’ll call it “mean reversion.”

In fact, it’s mean reversion from the 1 year price trend, too.

It’s a negative sign that small and mid size stocks are trending down even more, down nearly -4%. They’ve been laggards in this rally from the March low. In the early stage of a new bullish trend, smaller companies should trend up faster. Smaller companies are more nimble than large companies, so we expect to see them recover quicker from declines. When they don’t, we consider it a bearish divergence.

I can’t say I’m surprised. This is likely the early stage of a deeper bear market as I’ve operated through 2000-03 and 2007-09.

But, nothing is ever a sure thing. It’s probabilistic and probably necessarily implies uncertainty.

Managing money though a big bear market isn’t as simple as an ON/OFF switch, whereby we get out near the peak and then reenter near the low. I’ve traded through a lot of nasty market conditions, the nastiest aside from the Great Depression, and that isn’t how it has worked for me. I didn’t just get out and then back in a year or two later. There are opportunities in between for skilled tactical traders who are able to direct and control risk and manage drawdowns.

There’s a good chance this becomes a prolonged bear market similar to what we’ve seen twice over the past two decades I’ve been a professional money manager.

I wrote yesterday;

“It’s probably a good time for individual investors who don’t have tight risk management systems to shift to defense to preserve capital, but it’s not a guarantee, and yes, we’ll see.”

I’ll just leave it at that, today.

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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

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