{"id":26909,"date":"2012-01-27T10:35:15","date_gmt":"2012-01-27T15:35:15","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/01\/27\/does-low-volatility-put-your-portfolio-at-risk\/"},"modified":"2012-01-27T10:35:15","modified_gmt":"2012-01-27T15:35:15","slug":"does-low-volatility-put-your-portfolio-at-risk","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/01\/27\/does-low-volatility-put-your-portfolio-at-risk\/","title":{"rendered":"Does Low Volatility Put Your Portfolio At Risk?"},"content":{"rendered":"

Does Low Volatility Put Your Portfolio At Risk?<\/a><\/h1>\n

by Alexander Green<\/a>, Investment U <\/em>Chief Investment Strategist
\nFriday, January 27, 2012: Issue #1695<\/p>\n

The stock market gyrated so wildly in 2011 that many investors finally threw in the towel.<\/p>\n

How else can we read the massive equity fund redemptions that occurred in the second half of last year?<\/p>\n

But, apparently, the market has taken its anti-anxiety medication. After last year\u2019s gut-wrenching swings, U.S. stocks have been surprisingly tranquil. For 13 straight days, the Dow has moved up or down less than 100 points.<\/p>\n

This is good news for bullish traders and bad news for those who have been making money trading the VIX<\/a>. Let me explain\u2026<\/p>\n

The VIX is the ticker symbol for the CBOE Market Volatility Index, a popular measure of volatility in S&P 500 index options. According to The Wall Street Journal<\/em>, this so-called \u201cfear gauge\u201d has fallen 20% to levels unseen in six months.<\/p>\n

Why? One reason is that the U.S. economy appears to be getting back on its feet. Despite all the pessimism in the Eurozone<\/a>, U.S. corporations are busy reporting yet another quarter of all-time record profits. (Just how long will mom-and-pop investors ignore this salient point?)<\/p>\n

The Dow is up almost 500 points for the month. Fund companies report that money is flowing back into equities again. Yet the calm makes some investors nervous. I hear many analysts crying out that the market is about to plunge again.<\/p>\n

Deluded, Ignorant, or Both<\/strong><\/p>\n

Let\u2019s start with the straightforward declaration that anyone who claims to know \u201cwhat the market is going to do next\u201d is, by definition, someone who is ignorant, deluded, or both. The market will rise or fall next week or next month based on next week\u2019s or next month\u2019s news. Yesterday\u2019s news has already been discounted. (As Legg Mason\u2019s Bill Miller likes to say, \u201cIf it\u2019s in the papers, in the price.)<\/p>\n

Moreover, there\u2019s no historical evidence to show that a market pause generally precedes a correction. And the data go back pretty far.<\/p>\n

For example, market analyst Mark Hulbert has loaded the Dow\u2019s daily returns \u2013 all the way back to its creation in 1896 \u2013 into his statistical software. For each trade date since, he calculated the Dow\u2019s trailing volatility and then looked to see if the stock market performed any different following periods of low volatility than it did at all other times.<\/p>\n

The short answer? Nope. He came up empty. Perhaps that\u2019s the reason for the old Wall Street saw: \u201cNever sell a dull market short.\u201d<\/p>\n

There are two things to conclude here:<\/p>\n