Posts Tagged ‘Volatility’

Fundamentally Flawed

Friday, March 14th, 2014

Imagine if the outcome of a football game depended more on the weather than on the talent of the players.

Weather, indeed, can have an impact and should, but its role is usually to test the talents of the players, not to be the primary factor in the outcome.  When it is the primary factor, anything can happen.  In such cases, would you put money on the game?

The weather is not the number one factor affecting the performance of the stock market these days, but neither is the talent of the players – that is, the fundamental performance of publicly held companies.

In recent years, The Federal Reserve Board has held sway over the market’s performance via quantitative easing, although under former Chair Ben Bernanke, it was somewhat more predictable than the weather.AUDJPY

Now, with tapering under way, that may change (we’ll see, as many expect plenty of bond buying ahead).  Yet other world events may replace QE in determining the performance of the market.  That means potentially greater volatility than we’ve experienced in the easy money era.

It doesn’t take much to affect today’s global economy, especially when the impact of events is amplified by high-frequency trading.  Consider, for example, the impact of the falling yen and Australian dollar on the S&P 500.

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Swinging Markets Ahead

Sunday, June 16th, 2013

Volatility is back in a big way.  It’s back not only in the stock market, but in the bond market.  It’s back not only in the U.S., but in China, Japan and other countries.  It’s back not only in developed countries, but in emerging markets.

Just a few signs that volatility has returned:

  • The Dow Jones Industrial Average (DJIA) has had intraday swings of more than 100 points in 10 straight sessions.  On five of those days, the market finished up; on five, it finished down.
  • The Chicago Board Options Exchange Volatility Index (VIX) has jumped more than 40% since May 17.
  • Trading in VIX futures set records for each of the first four months of the year.  May was the third most active trading month ever.
  • The yield on 10-year U.S. Treasuries hit a 14-month high of 2.27% during Tuesday’s trading.

The VIX, also known as the “fear gauge,” jumped from a low of 12.26 on May 17 to 17.25 on Tuesday, but it is still at a relatively low level.  In 2011, it was regularly over 30 and in 2008, it rose over 80.

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High-Speed Casinos

Friday, April 26th, 2013

A tweet – 12 words, 140 characters – caused a selling frenzy last week, as the stock market dumped $134 billion in stocks in a minute and a half and the Dow Jones Industrial Average dropped 1 percent of its value, or 143 points.

The market recovered quickly, as the Associated Press announced that someone had hacked into its computer system and posted a fake tweet about two explosions in the White House.

But the hoax served as a frightening fire drill.  If it had been real, the average investor would have been burned alive.

We’ve warned readers about the dangers of high-frequency trading before.  This is an example of why we’re concerned.  If the White House explosions had been real, the algorithms that make decisions for high-speed traders would have continued selling, leaving the average investor behind as stock values tumbled.

Rick Santelli, on-air editor for CNBC Business News, said high-frequency trading has turned the markets into “high-speed casinos.”

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Ignoring the Cliff

Monday, December 17th, 2012

The fiscal cliff beckons and, as previously predicted, a resolution is unlikely.  So let’s ignore the cliff this week and consider what’s happening elsewhere.

Viva Europe!

Last week was a good week for Europe – at least in comparison to most weeks.

The Eurozone is in a recession; unemployment continues to rise, and both industrial production and retail sales have dropped even further than had been predicted.

So where’s the good news?  Well, for starters, European leaders were given the Nobel Peace Prize.  While we’re not sure what the sovereign debt crisis has to do with war and peace, at least Europe is not the Middle East.  In what other continent do neighboring countries lend billions of dollars to each other when they have no hope of ever getting it back?

In addition, the European Union reached two agreements this week:

  • The 27 EU countries agreed to give the European Central Bank (ECB) oversight of their banks
  • They also agreed to provide Greece with an additional $64 billion in bailout funds

The ECB has not always shown sound judgment and the wisdom of pouring more money into the Greek sinkhole remains to be seen.  But the Greek funding will at least stall a default, which could potentially bring down the currency union, and the banking agreement should at least expedite decision making.

Whether the new agreements will help solve the crisis or prolong the pain remains to be seen, but at least the European Union negotiated and reached compromises.  That’s more than can be said for President Obama and the U.S. Congress.

Volatility: Europe vs. the U.S.

The inability to compromise is affecting the volatility of U.S. markets.

This week, for the first time this year, Europe’s volatility index (VIX) dropped below the U.S. VIX (16.6% vs. 16.8%).  In addition, Europe’s Euro Stoxx 50, the European equivalent of the Dow Jones Industrial Average, is easily outperforming the DJIA, with a year-to-date return of +13.5% vs. +7.75%.

Zero Hedge reported, “Are we seeing a wholesale capital outflow beginning as US’ Fiscal Cliff fears trump any year-end shenanigans potentially coming from Europe (post-Summit)? One thing is for sure, certain media individuals will have to change their tune now Europe is the year’s winner and the US becomes the center of the world’s event risk focus.”

High-Frequency Trading Is “Predatory”

Credit Suisse’s trading strategy team released a report this week called, “High Frequency Trading – Measurement, Detection and Response,” in which the firm said, as Zero Hedge put it, “that high frequency trading is a predatory system which abuses market structure and topology, which virtually constantly engages in such abusive trading practices as the Nanex-branded quote stuffing, as well as layering, spoofing, order book fading, and, last but not least, momentum ignition.”

Get Your Food Stamps!

With unemployment figures and the housing market improving, the U.S. economy is on the upswing, right?  If that’s the case, why are a record number of Americans receiving food stamps?

According to the U.S.D.A., a record 47.7 million Americans are now living in poverty.  In September, a record 607,544 Americans became eligible for food stamps.

Imagine if we were in a recession!

Even the Volatility Index Is Volatile

Tuesday, October 11th, 2011

You know volatility is out of control when the index that measures volatility is itself setting new records for volatility.

In the second week of August, U.S. equity markets witnessed four consecutive days of 400-point swings, the first time that has happened in the stock exchange’s 115 year history.

Given that volatility, it’s no surprise that the Chicago Board Options Exchange Volatility Index (VIX) had its largest quarterly increase ever in the third quarter of 2011.  The VIX has held above 30% for the past several months, its longest period above that level since the five-month period of October 2008 to March 2009.

The VIX is a predictor of expected market volatility for the 30 days to come.  Anytime the VIX exceeds 30%, you can expect the market to be volatile for a month afterward.

The VIX is not nearly as high as it was in October 2008, when it spiked up over 80%, but it’s even more volatile than it was three years ago.

On four days in October 2008 (eight between August and December 2008), the VIX registered one-day swings exceeding 6.5%, which had previously happened only twice since its inception in 1990.  In fact, the VIX swings exceeded 20% on several days in 2008.

In August of this year, though, the VIX with one-day swings of 50%, 35.4% and 35.1%.  And the volatility is expected to continue.

Economic Briefs

Thursday, August 5th, 2010

 Supply Chain Strengthening

The ISM Service Index came in at 54.3 for July, a number that’s better than expected.  The index was at 53.8 in June and was expected to sink back to 53 in July.  The ISM is the Institute for Supply Management, so its indices for both the service and manufacturing sector signal growth in the supply chain when they rise.

Jobs Are Up

The ADP employment report shows that 42,000 jobs were added in July and Friday’s Nonfarm Payrolls could surprise to the upside.  July’s rise in private employment was the sixth consecutive monthly gain.  However, over that period increases have averaged a modest 37,000, with no evidence of acceleration.

Market Update

Yesterday’s market action remains in a tight trading range.  Can the S&P 500 close above 1130 by week’s end?  It’s possible.

Overall, the news has been positive, but underwhelming.  However, given the long stretch of bad economic news we’ve been enduring for the past several years, any improvement is welcome news, indeed.