But ever since market volatility surged in late April, small stocks appear to have lost their edge.
When volatility surges above that level, investors sell shares and hold more cash.The effect is to produce a portfolio with a much smoother ride than a conventional investment in the stockmarket (see chart).
A key measure of market volatility surged in late July to its highest level since the 1987 crash and has been sustained for a period not recorded since after the Sept. 11 attacks and the collapse of Long-Term Capital in 1998.
The surge in volatility prompted the Chicago Merc to raise its margin requirements for options on S. & P. 500 Index futures twice, first from two per cent to three per cent, and then from three per cent to four per cent.
Meanwhile, a rate cut from the Bank of Canada has pushed the loonie down to around 80 American cents, from 94 cents a year ago.The main reason for this sudden surge of volatility seems to be a divergence in monetary policy: no longer are central banks moving in the same direction.
In that event, Elliott expects a "collapse" in the dollar's exchange rate, a busted bond market and surging commodity prices — all accompanied by extreme volatility in the equity markets.
But when the markets went into a tailspin in August, volatility suddenly surged; it became much more likely that those who had previously bought options would be able to exercise them (particularly put options, which grant the right to sell at a given price).
On top of that, there have been wild swings in government bond yields, a jump in debt spreads and the continuing decline of the dollar.In this section Stepping beyond subprime Warning lights Slow motion Riding the cycle Comparison shopping Revaluation by stealth Same as it ever was ReprintsTo grasp one reason why volatility has surged, you need to understand how the Vix is calculated.
Option-implied volatility has surged to 232% up significantly from Friday's reading of 159%.
With investors anxious, stock volatility has surged.
