ProfitScore Update – September 2023
To the clients and friends of ProfitScore:
The Inverse Dance of Equities and Volatility
Equities and volatility, two vital financial metrics, often engage in a rhythmic dance, moving in opposite directions. Here’s a glimpse into their inverse relationship.
The Inverse Tango: Historically, when stock prices (equities) rise, volatility tends to wane, painting a picture of a market characterized by confidence and optimism. On the flip side, when stock prices tumble, volatility surges, reflecting heightened uncertainty and fear in the market.
Behind the Moves: Human emotions drive the stock market to a significant extent. During bullish phases, when stock prices ascend, a sense of complacency often engulfs the market, leading to decreased volatility. Conversely, bearish phases, marked by falling stock prices, stoke the flames of fear, resulting in erratic price movements and, thus, increased volatility. Factors like leverage, liquidity, news events, and feedback loops can also contribute to volatility spikes.
Why it Matters: For ProfitScore, understanding this inverse relationship is crucial. Volatility serves as a barometer of the market, with spikes often signaling a shift in market dynamics. By keeping an eye on the dance between equities and volatility, ProfitScore can better navigate the unpredictable waters of the financial markets.
Everyday ProfitScore uses a proprietary system to determine what volatility regime we are in, whether High-Vol, Low-Vol, or Neutral regime. Below is a chart of ProfitScore’s regime signals overlaid with the S&P 500.
Analyzing the chart presented, it becomes evident how volatility regimes impact equity movements. The sections shaded in blue correspond to periods of low volatility. In stark contrast, the red-shaded intervals represent periods of high volatility. This inverse relationship between volatility and equities underscores the importance of using volatility to make better data-driven decisions.
Important disclosure information: Past performance of a ProfitScore index is not an indication of future results. You cannot invest directly in any ProfitScore index. The performance of any ProfitScore index does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in an index. A decision to invest in any such fund or portfolio should not be made in reliance on any of the statements discussed above. Inclusion of a security within any ProfitScore index is not a recommendation by ProfitScore to buy, sell, or hold such security, nor is it considered to be investment advice. Index performance does not reflect any management fees, transaction costs, or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses, and commissions would reduce returns. ProfitScore receives compensation in connection with licensing rights to its indices. All information relating to any ProfitScore index is impersonal and not tailored to the specific financial circumstances of any person, entity, or group of persons.