Stock market outlook: Volatility is too low, traders should sell bounces

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The stock market is unusually quiet right now. Here's why that won't last, and why traders should sell on any bounce.

Price swings are muted no matter how you look at them. On a forward 30-day basis — something measured by the, which is commonly referred to as the stock market's fear gauge — traders are expecting the lowest volatility in more than two years. On an actual realized basis, the past 30 days have also been the most placid since 2021.

Those rising rates have led to a tightening of credit availability, a dynamic reinforced by recent banking-system turmoil. There's also the ever-looming geopolitical overhang of the Russia-Ukraine conflict, and the widespread impact it's had on energy and foreign-exchange markets. Kolanovic specifically references the dominance of option sellers, whose activity he says drives intraday stock-price reversions, which naturally leads to flat trading for the overall market. That subdued volatility then prompts mechanical buyers — like volatility-targeting and risk-parity funds — to add exposure. The net result is a market that seems strangely unbothered by negative headwinds.

The key word there is"artificially," which conveys the unsustainable nature of the market's current placidity.

 

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