It’s mid-August and the traditional summer lull has been accompanied by the equally traditional bout of summer complacency. Expected volatility, as measured by the CBOE VIX, appears comically low, having been in a long downtrend since the collapse of Lehman Brothers in 2008.
The VIX continues to mark time below 13, a level that it rarely holds for extended periods. In the chart below, the yellow line represents the VIX’ current level.
Don’t fight the Fed
How should investors position themselves for a rise in volatility? An approach often adopted by institutional investors when they expect market volatility is to overweight large-cap “quality” in the portfolio â€“ meaning large well-known companies that derive their earnings from sustainable sources of earnings (not through aggressive accounting practices) and have strong cash flows.
The below screening results from Eikon are a sample of U.S. stocks over $10 billion in market cap, with an Earnings Quality score above 80 (top quintile), with a beta less than 1 and trading below Fair Value based on StarMine’s Intrinsic Value DDM model.
These are relatively defensive stocks that tend to perform solidly, not spectacularly, in a rising market and provide less volatility when markets return to fretting over bond yields and tapering, Chinese growth, oil or the next new thing.
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