16/10/2014: No end in sight for the volatility

When markets become this volatile and fearful, only the brave or (or should that be very foolish) can make money (unless you are trading options). With fear flooding though the markets, trading in equities, commodities, forex and bonds have all exploded. Speculators love volatility because the sharp moves provide the potential to make significant profits, with huge volumes on all these markets being seen as a testament to that.

Take the move on the euro for instance. On the 8th October the euro closed at $1.2733. The current price of the euro today is $1.2733. In the course of those six days though there has been a 280 pip high/low range and an average daily range of 152 pips. The volatility has been high but the euro has gone nowhere. This reflects the push and pull of the panic in the markets of late. Having been a neckline resistance, it seems as though the $1.2700 level on the euro remains pivotal for the time being.

EURUSD   16102014

Equity markets have been hit by the flight out of riskier assets and the move into safer havens. With this in mind, the Yen which is seen as the classic safe haven has significantly strengthened against the dollar, whilst gold has rallied around $60 and US Treasury yields have dropped at a record rate.

The concern for the equity markets is that this is feeling like it is something more than just a mere pullback within the bull market. The FTSE 100 is now down over 11% since its September peak of 6904; the DAX Xetra is down over 16% from its high last month and the CAC 40 is down over 14%. Is it a concern that the S&P 500 has only corrected just over 7.5% from its high. In Europe, if the markets continue to fall in this precipitous fashion, the corrections will be nearing bear market territory (considered to be a correction of over 20%) in the next few days.

VIX   16082014

 

I have been speaking about watching out for a peak in the VIX Volatility Index which could signal a bottom in the market. However the VIX is now at its highest level since mid/late 2011 when the US debt ceiling crisis was striking fear through the hearts of investors and the S&P 500 fell 18% in just over 2 weeks. Capitulation in markets tends to be felt before the market bottoms. The huge volatility of yesterday felt like it was reaching the capitulation stage. However the process of capitulation can last for days before the support is formed. Wall Street futures suggest that the S&P 500 will open around 1.5% lower today. The rout seems set to continue.

So how best to play this scenario? I would say, keep both trading horizons and stop losses fairly tight. If you are caught on the wrong side of a rebound you do not want to be in a trade for long as it can involve significant losses. Also have realistic targets as the volatility can wipe out a profit as quickly as the profit can be generated.

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