Stock Market Volatility and Your Money

What should I do with my stock?

The past 4 weeks delivered significant fluctuations across financial markets, so what should I do with my stock? Great question, but to help you answer that question you should ask yourself:

  • What else am I invested in?
  • What is the objective of my entire portfolio and where does this stock fit in?
  • How large is my pain tolerance (at what point will I panic and sell)?
  • Do I understand the financial statements of the company?
  • Do I understand how the economy will impact the company?
  • Will I continue buying more shares if it drops (dollar cost averaging)?
  • Will I hold onto it through a recession?
  • Is my position hedged (See: Hedge Definition)? 

We’ve seen some volatility in the recent past, but this time I think it will continue through the end of the year. If you’re not ready for a bumpy ride, you may want to consider some hedging strategies or possibly selling some of your shares.

Option Values Not Correlating

Although financial markets are seeing solid movement, option values have not followed suit. Instead, volatility premium (measured by the VIX) remained subdued while violent market swings took over, leading to skewed option valuations.

Why would this happen? My guess is that markets appear to be anticipating:

  • The same global government intervention AND
  • The same market reaction to this intervention that we’ve seen since March of 2009.

Government intervention has been one of the main drivers of recent equity market success for the last 7 years. Historically, these global Central Bank free money policies drove violent market rallies- scaring off investor attempts at shorting markets- creating a one sided market full of liquidity holes (details of the liquidity topic would need to be addressed in a book).

Mohamed El-Erian recently spoke about this liquidity problem on CNBC saying,  “…let’s not forget there’s very little countercyclical liquidity, which means, when we hit a small air pocket, it turns out to be large.” See the Article Here

Great, now we can expect more of the same inability to navigate?

Not so fast.

S&P 500 Chart

The market movement is exciting for active traders, but this pattern surfaced a few times before.  A 10% drop rocked the market 3x in the past 5 years.

  • Recent equity market movement flirted with historically crucial market valuations. In the past, these levels triggered more monetary easing and somewhat built temporary synthetic floors.
  • True to form, January’s movement also triggered monetary easing when the European Central Bank (ECB) unleashed more “unlimited” support and easing initiatives. Because one major nation isn’t enough,  Bank of Japan (BoJ) ventured into the first ever NEGATIVE INTEREST RATE POLICY PROGRAM (first for a leading economy).
  • The US Federal Reserve also held a meeting this past week where they halted all activity on rate changes.  That’s the first step in the changing dynamic of the markets and could be a sign that the market cycle is finally turning.  IT IS THE FIRST TIME THE FED HAS HALTED POLICY and did not introduce new easing programs in response to markets.

Global Central Banks Policy Impact is Tapering

Although the recent market movements didn’t significantly alter option valuations, our recent analysis and new expectations show that global government intervention attempts are having notably less impact than in the recent past. For the first time since March of 2009 we are seeing diluted reactions to continued monetary policy easing. Instead of the violent reactions to loose monetary policy, the pattern broke and the last few weeks displayed markets that do not appear to be as excited about continued monetary easing.

This shift in human behavior/market reaction marks a change to the overall probability of a negative thesis playing out (negative, not the end of the world). Combine this new pattern with some additional catalysts and this could be the start of a change in market cycles.

Margin Debt vs. DJIA -a pattern to consider

NYSE Margin Debt Vs. S&P 500
The chart above shows how recent market corrections have strong correlations to extreme increases in private margin debt. This past year private margin debt set a record (see: irrational exuberance) and even exceeded values of the dow jones industrial average which has only occurred once in history: the peak of 2007.

What is margin debt?

It is people investing in financial markets with borrowed money. Right now we have a plethora of investors in the financial markets based on money that is not actually theirs.

How does this answer my earlier question…what should I do with my stock?

My hope is that you take this information, research, do more research, build a plan, and plan for your plan to be wrong.

Take a few minutes and consider your unique situation.  Next, write down your thoughts and concerns. Think about your thoughts and words again. Finally, share your findings with me by calling, emailing, or filling out the form below. 



For more information about life Insurance choices and your investment options contact:

Jason Soloman, The Investment Professor, Tactical Investment Advisors LLC
Phone: (980) 233-9770
Address: 19825-B #149, W. Catawba Ave, Cornelius, NC 28031

The information in this blog post is not intended as tax, financial, insurance or legal advice. Please consult a licensed professional for specific information regarding each individual situation. This post was developed and produced on a topic that may be of interest to the general public. The opinions expressed, and the material provided are for general information only and should not in any way be considered solicitation.

Photo: David Castillo Dominici, FreeDigitalPhotos  

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