Freaky Friday

Equity indices fell nearly 3% on Friday, again. The real drama, however, was in the risk markets. The VIX, the measure of volatility on the S&P 500 index, jumped almost 50%. That’s an extraordinary move, the highest level since April and a sign of real panic. Of course, by the end of the day, markets rallied, and everything was forgiven.

Still, if history is any guide, market tops often coincide with an increase in volatility. So, is this yet another sign to take some money off the table? For traders who’ve had a strong year and made hundreds of transactions, perhaps yes, but for long-term investors, probably not. That’s because timing the market comes with two big problems.

First, while taking profits never gets you fired, when do you get back in? If markets keep rising, it becomes increasingly harder to admit we were wrong, and harder still to buy back at higher prices. Second, missing just the ten best days of the year can cut our returns nearly in half compared to staying fully invested.

Another thing to bear in mind is that the volatility markets are closed over the weekend. Option traders tend to sell on Fridays to avoid paying two days of time decay. In all likelihood, the market got caught short when bad earnings news broke and had to cover at ever more extreme levels before plummeting back down again. Can’t wait to see what next Friday brings.