If the Volatility Index Hits 14, Prepare for Chaos

Volatility Index

Buy on the sound of cannons and sell on the sound of trumpets. That has been a good strategy for crisis investors looking to take advantage of long-term trends. Remember, the markets have a long-term bias toward the upside. But the markets always seem to get a bit too complacent when there is a temporary reprieve of calm. A decline in volatility is always a good opportunity for crisis investors. 

There is nothing in this economy that is normal. So, when we have an opportunity to invest in cheap volatility, we need to take it. One of the things that we like to focus on is an inexpensive investment on some of the world’s most overvalued companies. If put options are cheap because of lower volatility, it makes sense to take a shot. 

A 5% decline in technology stocks would quickly return a nice gain on these puts. I’ll give you a few ideas next week on how to trade low implied volatility if the markets get too complacent.

The Supply Chain Problems Accelerate

One of the key things that investors will need to prepare for in the months ahead is the prospect of dwindling oil supplies. JPMorgan Chase (NYSE:JPM) just released a report that suggested that crude oil may end up at zero supply in Cushing, Oklahoma this year. 

The ongoing mismanagement of energy policy in Europe and in parts of the U.S. has fueled a swell in demand for natural gas and coal. However, shortages of both due to supply chain worries also has certain power plants operating on oil. How environmentally efficient, huh?

We haven’t seen U.S. crude stockpiles diminish to current levels since oil last traded at more than $100 per barrel. The problem is that producers haven’t been expanding their output despite rising prices. There remain concerns across the energy sector that environmental policy will affect their future output. 

In Cushing, storage tanks require a minimum amount of oil to maintain normal functionality. That figure is about 20 million barrels. Well, we just saw a four-million-barrel drop, and storage is now around 31 million barrels. 

It’s wild to think that last year, traders were effectively paying companies to take crude away from them at the height of the COVID crash. If Cushing continues to see a supply decline, we could be looking at an outrageous increase in crude prices and shortages across the United States. 

People are asking where all of U.S. crude is going. Well, South Korea will have purchased the largest amount of WTI crude ever in November. We’re witnessing massive purchases in India, Taiwan, and other nations that are experiencing a massive supply crunch.

The United States government may have to ban exports in the coming months in order to ensure that existing supply chain problems don’t get worse. We are not even close to being out of the woods yet. The smartest thing that investors can do is buy companies that will benefit if oil prices continue to rise. Small producers that have strong balance sheets and low levels of debt fit the bill.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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