Market Update August 2014

I saw this headline this week and was reminded how often financial concepts are taken out of context:  “The VIX is Soaring!”

The VIX is a measure of volatility, and investors who watched their accounts bounce around the past week might have felt that statement was true.  But, really, is volatility “soaring”?  Let’s look at an outside strategy for comparison.

Direxion Funds runs a strategy that reduces market exposure at certain VIX values:  Below 17.5 they remain fully invested.  The highest spike in the VIX we’ve seen recently was an intra-day spike of 17.57.  Not even enough to trigger any kind of adjustment in this strategy.  It is our opinion that a VIX value below 20 is “normal.”  Therefore, what we’ve experienced in the previous few months has been much more sedate than usual.  Does your heart rate “soar” from laying down to standing up?  Sure.  It means you are alive.

 

Reality check – I know the news has been bad and it sounds like the markets having been going over a cliff of doom.  What happened?  Those lazy, hazy days of summer have made investors complacent.  On July 24th, the S&P500 hit a new all-time high of 1991.39.  As of Thursday’s close, we’ve dipped to 1909.57, approximately a 4% pull-back.  Not fun, but also not the end of the world….at least not yet.

The month of July was going along just great until the very last day.  The primary weakness has been in the small cap area, which we’ve been avoiding for a couple of months now.

However, not to completely contradict myself, but on August 6th, we are at a point of lowering risk on some of our portfolios – “just in case.”  After all, our philosophy is to be proactive, rather than reactive.  It is still our expectation, based on what we know now, that the markets will hit new record highs before the year is over.