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Will Stock Volatility Come Back?

by | Tips & Strategies

There comes a time when stocks grind higher at such an innocuous pace that one starts to wonder if this whole trading thing might be over. Has the mixture of the Federal Reserve and monetary controls taken risk out of the market? Will S&P 500 Volatility Index readings of 30, 40, and 50 become a thing of the past? Are put options on stocks headed to free?

The answer to these questions is likely no, but that isn’t to say the fear of the death of fear in the stock market is unwarranted. The S&P 500 closed at its 55th all-time high of the year last Thursday*, and it’s only September.

New Highs Are Nothing New

That said, a slew of peaks stacked on top of each other is not a novel concept in 2021; in fact, a myriad of new highs each year has become somewhat expected recently.

S&P 500 Index All-Time Highs
2021 2020 2019 2018 2017
55 33 37 19 54

Source: Yahoo! Finance (https://finance.yahoo.com/)

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How Many Highs Does It Take to…

While selling all-time highs has been a rough strategy for the last half decade, the cycle of stock movement that’s held for over a century (simply put: up, sideways, down, repeat) would predict that a plateau and fall is coming.** Take, for example, one of the last multiyear runs of many all-times highs: 1995-99.

S&P 500 Index All-Time Highs
1999 1998 1997 1996 1995
29 42 41 35 67

Source: Yahoo! Finance (https://finance.yahoo.com/)

This five-year span actually saw more highs in the S&P 500 Index than the current stretch stocks are on. Are equities on the precipice of a crash? Hard to tell. But many think one is due, and there’s little harm in planning for it if done in moderation.

Staying Small Selling Stocks

Futures can offer a low-cost outlet for either hedging your long stock portfolio or speculating on a crash, yet these low costs can reflect large size. Sprinkling in one or two Small Stocks futures might be more appropriate than a Micro E-mini or E-mini future after a dozen new highs.

Size of Equity Index Futures
Small Stocks E-mini S&P 500 Micro E-mini S&P 500
$7,800 $226,500 $22,650

Notional Sizes taken from Small Exchange and CME Group 9/3/21

There’s something enticing about selling a market that looks too expensive, and futures can let you go down that road with relative ease. Just make sure you’re able to see the end of it.

 

*S&P 500 Index data as of 9/2/21
**See stock market crashes of 1907, 1929, 1987, 2000, 2008 in Dow Jones Industrial Average via Yahoo! Finance

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© 2021 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment.

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The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

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