Volatility and the Secret of “Hot Money”

Volatility was down yesterday.

So were yields on the 10-year Treasury.

The result?

A winning day on Wall Street.

The Dow closed the day 165 points higher.

The S&P scratched out a gain of its own.

Only the Nasdaq finished the day in red — and by eight points.

And so our crackpot theory lives yet:

Stocks climb when both volatility and 10-year Treasury yields remain within certain thresholds.

And stocks fall when both volatility and 10-year yields exceed certain thresholds.

Volatility was down again today, we note — and stocks were up.

Volatility.

The word suggests a smoking mountain about to blow… uranium under pressure… a Tijuana dive overcrowded with drunken sailors and marines.

Trouble, that is.

But like ancients pouring oil on troubled waters to calm the seas, for years, central banks have doused markets with quantitative easing and zero interest rates.

QE suppressed volatility — and bond yields.

Markets had grown so mellow, the seas so placid, volatility fell to record lows in recent years:

And traders set their sails for easy waters.

Schwab:

The trades worked well during the quantitative easing (QE) era — when central banks around the world were buying government securities to increase the money supply and lower interest rates — because QE suppressed volatility along with bond yields. That provided a rare opportunity to get high returns in risk assets without the usual volatility.

But quantitative easing has now given way to quantitative tightening.

The Fed has blown a gale…

Angry clouds are filling the horizon… the winds are gusting… and the waters are specked with foam:

“With central banks unwinding QE,” Schwab affirms, “it was inevitable that yields and volatility would rise… These types of episodes of heightened volatility are likely to become more common as the era of easy money ends.”

The first volatile wave crashed on Feb. 5, when VIX spiked 116%… and the Dow plunged 1,175 points.

Subsequent waves have taken VIX on a heaving ride — and stocks have risen or fallen with the rolls.

But let us ask this question:

Is a volatile market a malum in se — a thing bad in itself?

Not at all, explain the folks at Macroption:

You would never make any profit on a stock with a constant price (zero volatility)… Without volatility there would be no trading opportunities and no traders… Even when you are a long-term investor and “buy and hold,” you would never make any money without prices changing.

Our new colleague Joshua Belanger likewise welcomes the return of volatility.

“Volatility might sound scary,” Josh admits, “but it isn’t. It’s actually very good news for traders. This two-sided market provides great opportunity to follow the “Hot Money” for chances at huge gains.

Who is Joshua Belanger?

Josh is a hotshot trader and former Wall Street insider.

He first cut his teeth on the floor of the Chicago Mercantile Exchange.

There Josh witnessed how firms and fund managers picked the pockets of their customers.

He quickly realized their only care was collecting their fees, while 95% of them underperform the market every year.

After playing by their rules and “busting his ass” for many years, an angel of conscience perched itself on Josh’s shoulder:

It started to not sit right with me. I had enough when I continued to be restricted on trying to do the right things for my clients to help them achieve better returns and having senior brokers dip their greedy paws into my checks, leaving me with barely anything to live on, telling me, “Kid, you gotta pay your dues.”

So Josh — as H.L. Mencken once put it — spat upon his hands, hoisted the black flag… and began slitting throats:

So I left that world behind with a vengeance to beat them at their own game and teach everyday, hardworking people who trusted these “wealth stealers” the know-how and confidence to manage their own money and to quickly generate returns to get them back on track.

He’s since shared his wealth-building secrets with over 129,000 everyday folks… folks sick of the “wealth stealers” separating them from their hard-earned money.

It is therefore with a doff of our cap that we welcome Mr. Belanger to our ranks.

Volatility is back.

And bashful money quakes in fear.

But with Josh’s guidance, you may have nothing to fear — but fear itself.

Regards,

Brian Maher
Managing editor, The Daily Reckoning