Written by Michael Bigger. Follow me on Twitter.
The stock market is a great optical illusion. When prices march much higher, volatility decreases but instability in the system increases. The opposite is true after a big fall. Volatility is high but stability increases.
These statements lead us to state the following dualities:
- Perceived instability is stable.
- Perceived stability is unstable.
What are some of the signs we believe indicate instability?
- Low implied volatility.
- A P/E ratio much higher than historical levels.
- Lower than typical implied options correlation.
- A decline in dividend yield.
- Your cab driver is talking about stocks.
What are some of the signs indicating a stable market?
- High implied volatility.
- P/E ratios comparable to or lower than historical levels.
- High implied options correlation.
- An increase in dividend yield.
- Panic in the market.
We have been fooled many times by Mr. Market. Have you?