We have seen significant price volatility (on the way up & down) on a handful of individual stocks and Bitcoin in recent days/weeks. Yesterday, this price volatility spilled over to the broad US equity stock market. All of this is interconnected. Here is why.
A small handful of stocks have seen their prices disconnect from their fundamentals. Meanwhile, a separate group of investors has tried to take advantage of this disconnect by shorting these companies. Ultimately, this becomes a vicious feedback loop if stock prices soar higher (which they did). Those funds are then forced to de-risk their books by selling other stocks in their portfolio. That is, in our view, what happened on Wednesday, January 27. The VIX Index spiked to 32, an increase of 40% from Tuesday, January 26.
There could be more volatility in the days that come if investors who are momentum/price based react to
Wednesday’s move. Will other investors step into the market to support it?
What does all of this mean? Does it matter? Not really, if you are a strategic long-term investor and have a balanced portfolio across stocks, bonds, and alternatives – the tenets that Astoria has built our foundation on. Keep in mind that we are seeing unprecedented fiscal and monetary support of epic proportion (although ironically this could be why there is excessive trading to begin with).
Perhaps the most important thing to keep in mind is bull markets last for years – not months.
Astoria would suggest taking advantage of any weakness to dollar cost average, further diversifying across factors, rebalancing back to your strategic asset allocation, and tax loss harvesting.
See Astoria’s interview we did with CNBC regarding yesterday’s volatility (click here).
Best,
Astoria Portfolio Advisors
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