A Place to Hide from Market Volatility

By Larry Benedict, editor, Trading With Larry Benedict

During election years, October is historically one of the worst months for the S&P 500.

Yet it looked like the stock market was going to coast along with minor volatility this time.

Then Halloween delivered a nasty surprise.

The final trading session in October was the worst day for the S&P 500 in over a month… and handed the index its first monthly loss since April.

Plus, the volatility signals that I’ve been warning you about are triggering.

That means a new period of chaos could be in the early stages as we eye the election and another Federal Reserve meeting this week.

So today, let’s look over the key metrics pointing to more volatility ahead… and one place where you can hide…

Volatility Signal Triggering

After trading for 40 years, I know when the ingredients are coming together for a surge in volatility.

Despite the calm on the stock market’s surface, I’ve been warning you that certain measures of volatility are creeping higher.

Recently, I showed you how the CBOE Volatility Index (VIX) picks up as we get closer to the election. The VIX measures expected price swings in the S&P 500, and it usually increases when the market is selling off.

I also showed you another indicator to watch for a market meltdown. I had this to say last week:

There’s another volatility measure you should be watching. But it doesn’t get much attention.

This measure tracks the volatility of the VIX itself – the Cboe VIX Volatility Index (VVIX).

VVIX often serves as a leading indicator for the VIX itself. It tips where volatility levels could be heading.

The arrow on the chart below shows that VVIX is breaking out from the pattern I told you about last week.

Here’s the updated chart below:

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That means VIX could be heading higher, which will often send investors scrambling for the exits all at once. That type of selling pressure often delivers quick losses.

But just as volatility signals trigger, one area looks ready to rally…

A Reversal Pattern Is Developing

U.S. Treasury securities are often seen as a safe-haven asset for investors. Treasurys historically hold up well during periods of stock market volatility.

Yet longer-term Treasury yields have been jumping higher since mid-September. That has been pushing bond prices lower. (Bond prices move inversely to yields.)

These factors are creating a favorable chart setup in one corner of the Treasury market with the iShares 20+ Year Treasury Bond ETF (TLT).

Take a look at the chart below:

(Click here to expand image)

There are a couple of things to note about the setup with TLT.

First, the sell-off in bonds has brought TLT deep into oversold territory.

You can see that the Relative Strength Index (RSI) fell below the 30 level in early October at “A.”

But look at what’s happened since then. TLT’s price went on to make lower lows from “1” to “2.” But the RSI made higher lows, shown with the dashed trendline.

That tells us downside price momentum is slowing. An oversold condition coupled with a positive divergence in the RSI can be a powerful reversal signal.

So if volatility keeps catching up to the stock market, watch for a rally in Treasury bonds as investors seek shelter…

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. As I shared at last week’s event, I’m expecting volatility to rise… and bring chaos with it.

We’re right on the cusp of a tense election… with a key interest rate decision in the days to follow. And the VIX isn’t the only market indicator suggesting trouble.

That’s why I want to share my favorite strategy for weathering choppy periods. It’s a tested method for making money even if the market is in a tailspin.

So if you missed my briefing last week, I want to give you one final chance to watch the replay. You can find it here for just a few more hours…