Be Thankful for Low Volatility?

Hopefully today’s tagline caught your attention as a contradiction when it comes to trading in today’s markets.

Still, the sentiment is very relevant in the real world. Today is the 70^th anniversary of the Allied invasion of German occupied France at Normandy in the largest amphibious assault that claimed thousands of American lives. While a different terror threat exists today, we can all be thankful that Europe and Asia were freed from the volatility of tyrannical, genocidal empires. Thank a WWII veteran before it is too late.

With that diatribe behind, let’s move on to the markets. The charts below depicts the year to date year results of the Russell 2000 (RUT) and the CBOE Volatility Index (VIX).

Chart 1: CBOE Volatility Index YTD (VIX)

(Source: Yahoo! Finance)

Chart 2: Russell 2000 Index YTD (RUT)

(Source: Yahoo! Finance)

The important thing to realize here is not to focus on the values on the vertical axis but the corresponding troughs and peaks on the calendar. For instance, buying the Russell 2000 at the height of volatility this year in early February got you a quick 20% return in a little over a month. Volatility is the catalyst to short term profits in any satellite portfolio and knowing what to pick and when to sell is matter of research and discipline. While there are plenty of quality stocks in the small cap space, making the quick buck trade is definitely more difficult with the volatility so consistently low. Look for levels of the VIX consistently over 15 to signal a time to start looking into the short term trades.

Speaking of volatility, the monthly jobs report came out this morning. The unemployment rate and labor participation rate remained unchanged at 6.3% and 62.8% respectively. Look for markets to react in somewhat positive way to the news today.

Have a great weekend!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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