Volatility Outlook: Brace Yourselves, Analysts Predict Even Wilder Market Swings

(Article by Alexander Crawford. List compiled by Eben Esterhuizen, CFA. Price data from Yahoo! Finance. Profitability data sourced form Fidelity.)

August certainly brought a return to market volatility, with the VXX volatility index up over 70% for the last month, and analysts aren’t convinced the volatility trend is ending anytime soon.

The VIX index, which measures the implied volatility of S&P 500 index options, increases when market uncertainty takes over and decreases as fear subsides. VIX has been trading near 39 over the last few days.

Jim Strugger from MKM Partners suggested to clients that 40 figures for the VIX will be the norm over the next couple of months, according to Barron’s.

MKM’s analysts believe “an increase in VIX toward the mid-40s is likely in the near-term and would position into equity market weakness via hedges and long volatility exposure for the possibility of an even higher-magnitude shock.”

Director of floor operations at UBS Art Cashin told CNBC that stocks will continue to be “very volatile and shaky,” directed by moves in the European markets until at least Obama’s jobs speech Thursday night.

Interested in trading this volatility outlook? One way to do so is by looking at a stock’s historical correlation to VIX. Correlation, which ranges from -1 to 1, indicates the linear relationship between two variables (in this case, a stock’s performance and VIX performance).

Stocks with high positive correlation to VIX tend to do well when volatility, or market uncertainty, rises. If you predict volatility to increase in the near term, look for stocks with a high positive correlation to VIX.

Here’s a list of profitable stocks that have shown a positive correlation to the VIX index over the last three months. Will these stocks continue to see gains during extreme volatility? Use this list as a starting point for your own analysis.

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1. Telefonos de Mexico, S.A.B. de C.V. (TMX): Provides telecommunications services primarily in Mexico. Over the last quarter, the stock’s correlation with the VIX index stands at 0.624. TTM gross margin at 60.64% vs. industry average at 49.95%. TTM operating margin at 24.65% vs. industry average at 15.54%. TTM pretax margin at 19.89% vs. industry average at 13.83%.

2. White River Capital Inc (RVR): Engages in specialised indirect auto finance business. Over the last quarter, the stock’s correlation with the VIX index stands at 0.56. TTM gross margin at 46.63% vs. industry average at 31.22%. TTM operating margin at 45.61% vs. industry average at 27.27%. TTM pretax margin at 39.62% vs. industry average at 22.82%.

3. EV Energy Partners LP (EVEP): Engages in the acquisition, development, and production of oil and natural gas properties in the United States. Over the last quarter, the stock’s correlation with the VIX index stands at 0.549. TTM gross margin at 65.26% vs. industry average at 32.74%. TTM operating margin at 18.01% vs. industry average at 16.21%. TTM pretax margin at 22.21% vs. industry average at 17.07%.

4. McDonald’s Corp. (MD): Operates as a foodservice retailer worldwide. Over the last quarter, the stock’s correlation with the VIX index stands at 0.547. TTM gross margin at 44.97% vs. industry average at 37.43%. TTM operating margin at 30.44% vs. industry average at 19.37%. TTM pretax margin at 29.27% vs. industry average at 17.91%.

5. athenahealth, Inc. (ATHN): Provides ongoing billing, clinical-related, and other related services to medical group practices primarily in the United States. Over the last quarter, the stock’s correlation with the VIX index stands at 0.536. TTM gross margin at 63.11% vs. industry average at 44.82%. TTM operating margin at 12.54% vs. industry average at 12.47%. TTM pretax margin at 12.45% vs. industry average at 9.91%.

Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

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