A top strategist thinks volatility will flood the market in September and ‘the rubber will really hit the road’ as the VIX creeps up

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  • The VIX index has increased by 15% in the last week, and a top strategist warns that more uncertainty will flood stock markets in September.
  • Ally Invest’s Lindsey Bell says a second virus stimulus-relief package, presidential election and earnings season are some of the biggest factors causing uncertainty for markets. 
  • “In September, you usually see the chance of a positive return on the month very low – below 50%,” she said. “We are going to see the rubber really hit the road.”
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The Cboe Volatility Index , Wall Street’s “Fear Index”, has been creeping up, and the implications are not temporary. 

Volatility will flood stock markets in as soon as four weeks from now, warns one strategist. 

Lindsey Bell, who is chief investment strategist at Ally Invest, told CNBC’s “Trading Nation” Monday:  “In September, you usually see the chance of a positive return on the month very low – below 50%.

Bell added: “We are going to see the rubber really hit the road.”

Bell said the biggest uncertainty risks for markets are: the upcoming US election, a second coronavirus relief stimulus package, and corporate conference season.

“With the increase of uncertainty, you’re going to see an increase in volatility,” said Bell. “We’ve seen it today. The VIX index is creeping back up.”

The Cboe Volatility index is a key measure of investor fear in the market. A higher number signifies a perception of greater uncertainty and risk among investors, and vice versa. 

The index is currently hovering around 25.50 as of 6: 42 am. ET. It has increased 15.5% in the last week. 

To put this into perspective, the VIX was at six-month lows around 21.40 in mid-August, reflecting growing investor confidence. 

The upcoming US election in November will be another factor continuing to push up the index.

Bell expects the uncertainty to drive frequent 1% to 1.5% daily swings in the major blue-chip indexes in September.

“As we get closer to the election and some of these other events, it gives room for that type of volatility in the market to return,” she said.

She added that the uncertainty will trigger daily swings in the range of 1-1.5% in September. 

Bell’s warning comes despite explosive stock market growth in recent months. Indeed, the S&P 500 and Nasdaq hit fresh highs on Monday. Aside from periods of extreme volatility, such as that witnessed in March and April this year, it is rare for either index to routinely move by more than that on any given day. 

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Stocks have been very volatile in recent months. After touching coronavirus lows of 2237.40, the S&P 500 has fully erased its 2020 losses and hit a record above 3,514 points on Monday. This means the index has recovered 53% from its March lows.

The surge in the stock prices of tech titans such as Tesla and Apple have been major drivers in Wall Street’s rally to record highs.

Bell cautioned against only investing in big technology companies. She thinks investing in cyclical and value groups will pay off for investors, especially after the development of a coronavirus vaccine, such as some of the consumer discretionary names that have profited from the “stay-at-home economy”. 

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“You may want to consider rotating out of the bigger names like an Amazon or Home Depot … which have done very well and have helped carry the sector, into some smaller names that haven’t done as well on a year-to-date basis,” she said. 

But she cautions against moving out of this year’s top-performing stocks just for the sake of it. 

“Remain in some of these growth and tech areas that have continued to do well,” Bell said. “You can hide out there to an extent, because they don’t necessarily need economic growth to do well.”

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