No Metrics Are Certain, Not Even Volatility

Market Trends - 10/09/2015

September is a significant milestone for every financial year, as it marks a return to high volume, better liquidity and a more influential momentum after the usual summer lull. Market participants where the economy is typically cyclical in this fashion see September as a time to get one’s bearings on the trajectory of subsequent months. However, trends seen in this early stage of September have been abnormal. While the volume increases seen are expected, price swings of whole percentage points are not common, and draw similarities to the tumultuous conditions prevalent in the 2008-2009 trading year. One good example of an asset currently riding on rough seas is oil. Crude oil has been through daily ups and downs of almost 4% in the last few months, which is worrisome for investors that seek to take pending positions or set stop-loss orders. A good way to term the trend in the markets seen recently is ‘volatility of volatility’, meaning that not only is volatility prevalent, but it itself is unpredictably volatile. The difficult conditions in equity markets in particular turn sentiment bearish for many investors and the market as a whole may soon change the outlook accordingly.

As central banks are seen to be changing monetary policy with increased frequency in order to stay competitive, announcements from bodies like the FOMC spur large spikes in daily volatility. Compounded with liquidity issues and margin calls, panicked trading sessions are commonplace. The Japanese Nikkei index, for example, rose 7.70% yesterday alone, the strongest upswing since 2008. During uneventful periods on the economic calendar, the markets almost don’t know what to do, and relatively quiet conditions prevail like we saw in the U.S. on Monday and Tuesday. Besides the FOMC, China is also a huge driver of volatility, and no matter the announcement from the Fed next week, conditions are unlikely to give in. The only options left to traders trying to understand proper risk-reward settings are to increase their risk tolerance, which is likely to push volatility to greater heights in the near future.


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