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The Chicago Board Options Exchange's (CBOE) Volatility Index, commonly known as VIX or the "fear index," has surged to a level not seen in decades, indicating potential market turmoil. Is this the start of a financial crisis? Today, we will delve into this topic with Cathie Wood, the CEO/CIO of Ark Invest.

The Investing Wise Academy (IWA) has just launched the IWA Portfolio! What can you expect? We will regularly provide bite-sized but valuable information about our portfolio. If you prefer to follow our trades simply, we'll just share a raw copy of all the trades for our carefully chosen three portfolios. Consider joining our Premium membership. You will have access to our IWA Portfolio, where you can see the daily stocks we trade.

To begin, let's check in on the financial markets.👇

In a dramatic turn of events, financial markets were rocked Monday as the VIX, the barometer of market volatility, surged to a staggering 65. This alarming spike, unseen in four decades except during pivotal moments like the 1987 Black Monday crash, the 2008 financial crisis, and the 2020 pandemic, has sent shockwaves through Wall Street and ignited fears of a potential market meltdown. Cathie Wood, the renowned CEO of ARK Invest, suggests this volatility mirrors past crises, presenting both unique opportunities and significant risks.

Understanding the VIX: The "Fear Index" Demystified

The VIX, often called the "fear index," is a key indicator that measures the market's expectations for future volatility in the S&P 500 over the next 30 days. While often misinterpreted as a measure of fear, the VIX reflects the anticipated range of price movements, whether upward or downward. A higher VIX indicates greater uncertainty and potential for large positive and negative price swings.

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The recent VIX surge to 65, surpassed only a handful of times in history, implies that the market is bracing for significant fluctuations in the S&P 500. This translates to a potential monthly movement of +/- 18%, a weekly movement of +/- 9%, and a daily movement of +/- 4%.

Delving Deeper into the VIX Calculation

The VIX is not merely an arbitrary number; it is meticulously calculated using a complex mathematical formula that considers various factors, including the prices of options on the S&P 500 index. These options, which give investors the right to buy or sell the index at a predetermined price in the future, provide valuable insights into the market's expectations for volatility.

By analyzing the prices of options with different strike prices and expiration dates, the VIX formula derives an annualized figure that represents the expected volatility over the next 30 days. This figure is then expressed as a percentage, with higher values indicating greater expected volatility.

It's important to note that the VIX is not a perfect predictor of future market movements. There is often a discrepancy between implied volatility (as measured by the VIX) and realized volatility (the actual volatility). This phenomenon, known as the "volatility risk premium," reflects the tendency for investors to overestimate future volatility, leading to higher option prices and a higher VIX.

Cathie Wood's Analysis: Echoes of Past Crises

Wood highlights two specific crises that share similarities with the current market environment:

Wood also points to another potential risk factor: broad-based price deflation. While inflation has been a major concern recently, Wood argues that deflationary pressures could be building beneath the surface. She cites the declining prices of commodities like gold and silver as evidence of potential deflation, which could further exacerbate market volatility.

Navigating the Turbulent Waters: Opportunities and Risks

While the current market conditions may seem daunting, Wood suggests they also present unique opportunities for investors. In the aftermath of past crises, such as the 1987 crash and the 2020 pandemic, sharp declines in stock prices often created attractive buying opportunities for those who were prepared to take advantage of them.

However, Wood cautions that the current situation is also fraught with risks. The potential for a prolonged market downturn, similar to the aftermath of the 2008 financial crisis, cannot be discounted. Additionally, the threat of deflation could further complicate the economic outlook and hinder market recovery.

Investors must exercise caution and adopt a strategic approach to navigate these turbulent waters. Diversification, risk management, and careful analysis of individual stocks and sectors are essential.

The recent VIX explosion is a stark reminder of the inherent volatility in financial markets. While the future remains uncertain, investors can mitigate risk and potentially capitalize on opportunities by staying informed, diversifying their portfolios, and carefully considering the insights of experts like Cathie Wood. As she aptly puts it, "Lots to discuss!"

Ultimately, the stock market experienced a significant correction, leading to many stocks and indices collapsing. For those familiar with the stock market, this was an opportunity to find valuable bargains.

Now, you understand why Warren Buffett is holding $277 billion in cash.

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Our IWA portfolios consist of trades from our stock basket. We believe in long-term investments and have curated a selection of carefully chosen stocks to create a well-balanced, safe, and profitable stock portfolio. You can access our daily trades from the three portfolios we manage.

The easy way to begin or enhance your investment journey is to learn from what works for others. This section is for you if you want inspiration from an existing investment portfolio.

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One of my oldest investment portfolios was started during the pandemic. It's where I began paying attention to finding reliable stocks that could generate annual profits. As of August 6, 2024, we added Nvidia ($NVDIA) to our holdings. We couldn't resist shopping, and in fact, we funded multiple trading accounts across the globe. Some might call it panic buying of our target instruments.

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After the impressive earnings, our Palantir holdings rose to 13%. We look forward to the next quarter. It will be exciting to see how Alex Karp and his team are positioning Palantir to surpass the $50 mark by the end of the year.

DeFi (DEFTF) stock has experienced a tumultuous period in recent weeks, marked by significant gains and sharp declines. However, a closer look at the data reveals some underlying trends and potential investor opportunities.

Recent Performance Highlights:

FY24 Q1 Financial Report (May 15th):

The Q1 report revealed a mixed bag of results:

Interpreting the Data:

The recent price action and financial report suggest that DEFTF is a high-risk, high-reward stock. The company operates in the rapidly evolving DeFi space, which has the potential for significant growth but also faces regulatory and competitive challenges.

Strong revenue growth indicates that $DEFTF is gaining traction in the market, but ongoing losses raise concerns about its long-term profitability. Additionally, the high volatility makes the stock susceptible to sharp declines, as seen in recent weeks.

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Remember: Investing is a journey, not a destination. It's about making informed decisions, managing risk, and staying committed to your long-term goals. So, take the time to research, experiment, and find the perfect recipe for your balanced portfolio.

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Cheers to wealth, wisdom, and a dash of madness!

The Investing Wise Academy Team

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