Socially Acceptable Volatility Strikes Again

By:

Chief Strategist at Interactive Brokers

Those of you who are faithful readers – and innumerable thanks for that! – know that while I’m quite liberal with my use of citations and web links, I rarely repurpose content from other sources.  Today I will make an exception.  Though to be fair, I’m repurposing content that I helped create.

I was pleasantly surprised when I first checked my email today and noticed this:  “Why One Strategist Calls This Market Rally ‘Socially Acceptable Volatility’”.  The source was the Yahoo Finance Morning Brief, which offers daily market commentary from one of their journalists, and to which I’m a subscriber (it’s free, btw).  I was fortunate to join their team in studio yesterday for the first time in years, and while I was well aware that a clip of my appearance was available on their platform, seeing it as their featured story today was quite a treat.

The term “socially acceptable volatility” should be a familiar one to many of you.  We first wrote about it (coincidentally) exactly one year ago today, then revisited the topic again in February both in print and in a podcast with my friend Steve Sears.[i]  The concept is rather simple – investors are biased toward rising markets.  If you’ve invested in stocks, by definition you want and expect them to rise.  And over time they do rise.  But not always.  We tend to worry about market volatility when we decline by a significant amount but take a similar rise in relative stride.  They’re supposed to go up, right?

It is important to remember that volatility is a mathematical concept, measuring up and down moves alike.  Yet when it comes to market psychology, we know that they are vastly different.  Traders clamor for protection from volatility when markets decline, yet shun protection when they rise.  Investors want to be exposed to the upward moves.  That is why VIX acts as the market’s “fear gauge” even though it is not explicitly constructed as such.

I urge you to watch the linked video, especially if you’re one of those who complain that I have largely abandoned videos in favor of the written format for this site.[ii]  Bottom line, I remain skeptical that we have truly seen the end of this bear market.   I believe that at a minimum, we need to see the Fed and other major central banks signal that they have ceased their restrictive monetary measures before we can make a lasting move higher.  The ECB raised rates today, the Fed is expected to do so next week, and quantitative tightening is yet to kick in in full force.  Until we see a change in these tactics you’re fighting the Fed, which is a tactic that rarely succeeds in the long term.

[i] Steve Sears actually came up with the term, which I adopted with his permission and encouragement.  I promised to footnote him whenever possible – here’s an actual footnote.

[ii] If you’re wondering why, there are a few reasons.  First, while they are easier for me to tape, they are much more onerous on the website manager, editors and compliance staff upon whom I rely.  Second, now that I have had to edit our podcast transcripts, I realize that I am a vast repository of verbal tics and false starts.  The written format allows me to edit those out.  Third, it is much easier to reference a point I have previously made in a written than a video piece. 

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers LLC, its affiliates, or its employees.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.