Displaying items by tag: volatility
For most of the day the stock market was in positive territory yesterday. However, right at the close, the market was gripped by a swift selloff that pushed it into the red for the day. If the saying holds true—that smart money trades the close—then today could be an ugly one. The drop at the end seemed to foretell more volatility to come, and show that the market has not psychologically recovered from Monday. The market may remain directionless until next Wednesday, when new inflation data comes out. Investors are worried about the prospect of stronger inflation, and thus a quick rate rise.
FINSUM: The markets are trying to find a new baseline for valuations as investors search for a new narrative of where shares are heading. The US economic picture is strong, but there is no tax cut or other major carrot being dangled, which seems to be hurting prices.
One of the Financial Times’ most respected columnists has just published an article making a grim comparison. Saying that he dreads even mentioning it, John Authers argues that the current state of markets and the context of the losses are very similar to the summer of 2007, or the eve of the Financial Crisis. In particular, just like then, stocks moved higher even as bond yields did, all until a yield threshold is broken, when stocks finally panic. Then, even though fixed income started the worries, equity investors flee into the safety of bonds. The important extension of the argument is that all the associated fallout will not occur this time, as the economy is stronger and more balanced.
FINSUM: So this is only a half comparison. The actual market event may be similar, but the condition of the economy, and its link to markets is very different, and almost inarguably better this time around.
It seems like every time there is a big plunge in the market over the last few years one can trace the root cause back to a few products traded by people, but more often, machines. Well, it is no different this time as Bloomberg says two tiny volatility products, which now only have $135m under management, were largely responsible for the selloff. One of the products is the VelocityShares Daily Inverse VIX Short-Term ETN, which will soon be delisted. Despite the small size of the products, traders closely monitor the products’ behavior, and that is said to have caused the panic, as traders predicted how the funds would rebalance and front ran that rebalancing.
FINSUM: Well, at least it was not an algorithmic disaster this time. This sounds a lot like good old fashion human gamesmanship.
The stock market is rich, with prices sky high and valuations closing in on their historical peak. The conundrum, though, is that while there is a lot risk, there may yet still be a long way for the market to rise before falling. How to play it? The answer is the options market. Because the incredibly long period of low volatility, options prices are very low, which means if one uses a solid options strategy, there is a potentially inexpensive and effective way to play the market.
FINSUM: This seems like a smart way to play further upside, while keeping costs down, especially if you are already long stocks to a major degree and want to take some chips off the table.