Equity market cheerleaders got very excited about the Dow Jones Industrial Average hitting a new record high yesterday (Tuesday).
The Dow closed at 14,253.77, topping its previous record close of 14,164.53 on Oct. 9, 2007.
While it is nice to see a sign that equities are improving following the devastating shock of the financial crisis of 2008, today's Dow Jones Industrial Average is not the same index as it was in 2007.
In fact, if we look back at when the Dow Jones Industrial Average last exceeded 14,000, we'll see that the Dow seems to have less of a connection now to what is really happening in the economy than it did in 2007.
As Volatility Hits New Lows, It Could Be Time to Sell
The average daily price volatility of stocks has fallen more than 60% since the beginning of 2013. It's the biggest straight-line drop in some 82 years.
A lot of investors are rejoicing. After all, stocks have risen an average of 17% a year when volatility is as low as it is right now, Bloomberg reports.
There is, however, a dark side to low volatility. Namely, it tends to precede powerful reversals that can wipe out investors, as was the case in 2000 and early 2008, and at other key turning points over the past 100 years.
Today, I'm going to talk a bit about what low volatility means for you in terms of upside, and also show you how to protect yourself in a downslide.
Let's start with the concept of average daily volatility itself.