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There’s an eerie calm that’s fallen over the markets… as they climb to fresh all-time highs…
The Wall Street Journal reports implied and realized volatility in the U.S. stock market has fallen to a two-decade low. Over the last 30 days, both the market’s fear of a sudden correction—and its actual price action—have registered their lowest points since 1995…
Just take a look at the chart below…
The article goes on to say the U.S. central bank (the Federal Reserve) gets the credit for today’s rampant complacency. Traders and investors are counting on the Fed to “backstop” them in the event of any serious move lower. And why shouldn’t they…
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The last three Fed chairs (Greenspan, Bernanke, and Yellen) have all kowtowed to the market’s tantrums at the first sign of any significant trouble. It’s a recurring pattern now known as “the Yellen put” (substitute “Greenspan” or “Bernanke” for “Yellen” in years past).
[Traders would often buy put options as a form of “insurance” against a sudden market collapse. But why should they pay for insurance when they know the Fed will provide it for free (through lower interest rates and “quantitative easing”—i.e., money printing)? Hence “the Yellen Put.”]
Regular Daily readers know it’s a perfect setup for a market “smackdown”…
Explosive spikes in volatility almost always follow long periods of calm. Just as a rubber band snaps back harder the further it’s stretched… so do the markets react to “excessive calm.” It’s a simple “reversion to the mean” action.
Here’s how the Journal piece concludes:
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The lesson of the past seven years is that policymakers will step in every time disaster strikes. But investors tempted to rely on the central banks should note that disasters did still strike, and markets had big falls before help arrived. The time to buy insurance is when it is cheap, and for the U.S. stock market, that is now [emphasis added]. |
The Journal is right on here. If you’ve not had a chance to buy any chaos hedges—including PBRG’s favorite, gold—now is the time. The gold price has come down about 2% as volatility receded. Use this weakness as a chance to stock up (up to 3-5% of your total investible assets). You’ll be glad you did when the next market shock hits…
Reeves’ Note: Tom and Teeka have found two tiny gold plays they expect to return between 300% and 838%… while still maintaining lower risk profiles than the broad gold-mining sector. They share the details inside Palm Beach Confidential. Learn more right here.
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