The volatility samiel that has rocked the market could be just getting started if authentic trends hold up.
Products that track market volatility carted focus as the market endured its first meaningful pullback in two years. Exchange-traded offerings that bet against market tumult have gotten shellacked and some square have liquidated.
Seeing such behavior in February, though, isn’t unchanging with market patterns over the past few decades, according to DataTrek Inspect. The firm, in fact, found that the most popular fear also gage on Wall Street, CBOE’s VIX volatility index, has only peaked formerly in February since its 1990 inception.
“U.S. equity market volatility is greatly informed by seasonality,” DataTrek founder Nick Colas said in his circadian note Wednesday.
The VIX spiked past 46 during a whipsaw swop day Tuesday before closing around 37. While many investors promising are hoping that the dizzying movements are the worst of the year, the calendar doesn’t treacherously that up.
That’s because the measure has peaked for the year in February solitary once during its existence — interestingly, the only other time was during the deal in’s early 2016 upset.
Most of the other peaks have been gathered around August and October, which have 36 percent of the annual highs. Adding January achieves that total to 50 percent.
In 2018, that trend is explicitly notable because of the November midterm elections. Republicans will be truculence to fend off what could be a formidable challenge from Democrats looking to capitalize on a weird type of volatility — the political type, which has seen President Donald Trump’s put ones imprimatur on rating hover around the 40 percent range.
“August of this year on coincide with the peak of the campaigning around midterm elections in the U.S. It desire also be enough time to see the true effects of the recently passed tax change package on consumer spending and business investment,” Colas wrote. “And it is also a ordinary month for peak volatility.”
So while the VIX tumbled off its peak Wednesday and stirred closer to its long-term average near 20, history argues that there’s uncountable volatility to come. That’s bad news for the exchange-traded products that bet against volatility, such as the ProShares In a nutshell Bermuda shorts VIX Short-Term Futures and the VelocityShares Daily Inverse VIX Short-Term ETN.
Both yields use leverage to play against volatility and have raised concerns this week closed the effect exotic exchange-traded products could have on market resoluteness.
Investors, then, would do well to keep the early-year churn in undecided and position accordingly.
“Our central investment theme is that the narrative enveloping U.S. equities has shifted from simple (higher earnings and stable counts) to complex (the effects of tax reform on inflation and interest rates, the direction of the dollar, and uncertainties finished stock valuation),” Colas wrote. “Higher volatility is a true to life extension of this shift.”
WATCH: The short-volatility trade was just one angle of the recent sell-off.