Volatility of Volatility is when things start to change. Asset classes are in transition. These events tend to happen at the extremes of ranges. When near the top of a range he is looking for signs that the bears have capitulated and implied vol has discounted or bottoms of ranges and there is an implied vol spike as people buy protection.
How does McCullough differentiate a pullback vs. a change in trend?
“When you get a move down in a bull market in price, and the volume is decelerating and still, the volatility has not changed, it is a buy the damn dip signal,” McCullough explained. “If you get a down move in price on rising volume, on a new change, a potential cluster of volatility that will be, could be the beginning of a new trend, that is the one to pay attention to on the risk management side.”
After finding those signs, he factors in price, volume and volatility. With that three factor model in mind, the picture begins to become clear.
If you are anticipating more volatility, how can you best navigate the markets? Mark Newton, CMT founder & president of Newton Advisors explained such an approach to Real Vision.