Displaying items by tag: volatility

(New York)

It has been many years since we had significant and sustained volatility. Both 2011 and 2013 had significant moves, but it had been almost five years since the kind of eruption we saw over the last couple of weeks. It was an amazing 404 trading days that the market had gone without a 5% drop. Barron’s says investors need to get used to the recent discord, as the volatility is here to stay. The paper borrows its argument from equity research analysts who contend that market stability is impossible, and any semblance of it an illusion, as the very forces that try to promote stability, such as the Fed, ultimate drive volatility.

FINSUM: This is quite an esoteric argument, but the reality is that with the economy changing gears into a new paradigm, we are likely going to continue to have some bumps.

(New York)

The Dow experienced mild gains yesterday, with just a 40-point move higher. After so much back and forth recently, nothing could have been more welcome for many investors. The mild move begs Barron’s to ask the question of whether stocks have finally found a floor after a roller coaster two weeks. Stocks started rough, but rallied late in the day, giving signs of renewed optimism. The most interesting part was that after opening down 180 points, bids started to appear which supported the market, leading some to believe that there is actually a market clearing price in place.

FINSUM: Whatever the market did until now is immaterial in our opinion, as it is this morning that inflation data comes out, and that will ultimately be what moves markets in one direction or another.

(New York)

The market fell another 4% yesterday, pushing all the major indices into a correction, meaning a 10% drop or more. However, the reality is that this really isn’t much of a correction, at least yet. Looking at a number of the most common valuation metrics, such as P/E, CAPE, dividend yields etc, stocks are still very expensive. Even considering this fall, they are still up 19% over the last year. That means it would take much a more substantial fall to push them into the territory where they could be a buy on a “value” basis.

FINSUM: A few thoughts here. Firstly, stocks are only a buy right now if you think the market is taking a break before heading higher. Well, that is our view. The market is all concerned that growth is too good, which through some mechanisms (like the Fed) will lead to a recession. In early 2016 (the last time a correction happened), the market was worried about a dismal economy. That time the fears were wrong, and we think they will be this time too. This has been a middle of the road recovery for almost a decade, and we think it will revert to that mean, avoiding investors’ worst nightmare—growth! (as if that is such a nightmare).

(New York)

The VIX is the predominant measure of volatility. Everyone keeps and eye on it, and everyone trades it. Over the last couple of years many have made great money shorting it. However, the focus on it has now led the index to outgrow itself, says its founder. Now, we have a case of the tail wagging the dog, where instead of the VIX measuring market volatility, the market is watching the VIX, which itself incites volatility. In his own words, VIX founder Sandy Rattray, formerly of Goldman Sachs and now with Man Group, says “The Vix has moved from being a measure of something to being something that influences this thing it is trying to observe”.

FINSUM: Observing the VIX has turned into an obsession to the point where it creates a self-fulfilling prophecy. This is quite similar to the case of technical traders who are all observing the same measure and then all act at the same time, creating the reality they predict.

(New York)
One of the most respected financial publications in the country has some bad news for investors: the selloff is not over yet. Barron’s argues that the selloff is not close to over, despite the mild recovery, because investors are not yet use to the new “yield backdrop”. For the first time in over a decade, the market seems to be pricing in higher rates and a tighter monetary environment. “The going bet, now, is that the Federal Reserve will continue to lift rates, and thus tighten credit, and maybe to a degree that produces an economic recession”.

FINSUM: We think more volatility is on the way and that it will take a little time for the storm clouds to clear, but we do not expect a bear market, or much more than a 10% overall correction.