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U.S. Equity Volatility is currently at levels where investors can either make big mistakes, or capitalize on market moves and compound their gains. "Risk happens slowly, then all at once." - Hedgeye CEO Keith McCullough |
After spending roughly three weeks (from late February to mid March) in the F#$k Bucket (VIX > 30), equity volatility has fallen into the 20-30 range (The Chop Bucket).
U.S. Equity Market Volatility across major indices currently sits at (levels as of 3/23 AM):
- VIX (S&P 500 Vol): 21.73
- RVX (Russell 2000 Vol): 27.16
- VXN (Nasdaq Vol): 27.89
The Russell 2000 & Nasdaq typically have higher volatility profiles than the S&P 500, as seen in the chart below.
Why is this important for investors?
Effective risk management is particularly critical when Volatility sits in The Chop Bucket, especially when coming out of a F#$k Bucket regime and heading into a Deep #Quad4 (read: deep bear market), as those beridden by narratives and emotions get #ChoppedUp.
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"When volatility is rising, your amygdala is triggered, you're panicking and your brain starts to look for reasons (political or Wall Street narratives) to explain this bout of volatility." - McCullough |
Volatility is a key part of the Hedgeye #Process as one of the three components of Hedgeye's Multi-Factor Price, Volume, and Volatility model. Vol is an essential tool in any serious investor's toolkit. If you're not incorporating it into your investment process now, we highly recommend you start now.
Keith McCullough's Three Buckets of Volatility
- The Investable Bucket: VIX = 10-19 → "That's when anyone can make money long stocks."
- #Quad2 la-la land for memestocks and altcoins galore
- The Chop Bucket: VIX = 20-30 → "When you go back and forth in that bucket, you can make a lot of money as a trader because there's a lot of panic at the top end of the Hedgeye Risk Range™ Signal and complacency at the bottom end.
- Where we are right now... and where effective risk management is key
- The F#$k Bucket: VIX = > 30 → "When you're greater than 30 volatility and it stays there, that's trending volatility. That's where even some of the best investors die."
- Graveyard for permabulls
McCullough on how he's Trading the chop bucket
In a recent edition of The Macro Show (3/22/22), Hedgeye CEO Keith McCullough hit on the 3 Buckets of Volatility, and how he’s trading “The Chop Bucket” in the current Bear Market.
“Bear Markets don’t happen the day that you need them to; you have to execute inside these OODA Loops.”
“If the VIX gets to the low 20s, it’s still in 'The Chop Bucket'.”
You can watch the full clip here.
We’re currently in the low 20s… so this clip is a critical watch at this particular point in market time.
