MarketWatch's Reeves: 5 Myths About Stock-Market Volatility

Tuesday, 26 Aug 2014 05:10 PM

By Dan Weil

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Ever since the CBOE Volatility Index (VIX), which measures expected volatility for the S&P 500 index, hit a seven-year low in June, market participants have taken notice.

But much of what passes for wisdom about volatility is myth, says MarketWatch columnist Jeff Reeves. He offers five specific untruths.

1. "The market has gotten volatile lately." That's incorrect, Reeves says. The S&P 500 hasn't endured a 10 percent correction since October 2011.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

2. "Volatility is a sign of a bubble."
Volatility regularly rises and falls, whether the market's in a bubble or not.

3. "Clearly, stocks are crazy volatile. Thankfully, you can just trade volatility and not stocks via the VIX." You can't directly trade the VIX. It's based on options, but those options are based on the S&P 500.

4. "All investors trade the VIX, at least as a way to hedge their portfolio." No, the VIX has been in decline since 2011.

5. "Sure, there’s no volatility now, but that’s about to change." False again; "anyone who claims to know the trajectory of the VIX based on technical analysis is a joker," Reeves writes.

The VIX stood at 11.65 Tuesday afternoon, down 0.05 from Monday.

Many market participants, including Michael O'Rourke, chief market strategist at JonesTrading, think the lack of volatility has made investors overly complacent.

"The biggest mistake people make is looking at the current environment and extrapolating that it will continue into the future," he told The Wall Street Journal in June.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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