Volatility: Buy, Sell, Trade?

Nicholas Kitonyi  |


Market volatility is a crucial element for the financial markets and without it, perhaps the industry won’t be as big as it is today. The US fortune 500 companies represent a combined value of more than $21 trillion while the global Forex trading market averages $5.3 trillion in daily turnover.

The uncertainty of the global stock and Forex markets is what continues to attract traders who in turn drive the total value of transactions by driving prices higher and increasing the number of transactions.

One of the most reliable indicators of volatility is the CBOE Volatility Index (VIX). Based on the current data, market volatility went a point or so higher in October, and the same trend is expected to persist through the rest of the year.

Nonetheless, while short-term investors would be eager to capitalize on the power of the current market volatility, this might not be as pleasing to long term investors. We are currently on the tail-end of the calendar year and are relishing the impact of the final earnings season as we also welcome another festive season that demands a lot of spending.

The Funds Rate and Economy

The U.S. Federal reserve is gearing up to another interest rate hike in December with the upcoming FOMC meeting next month just on the horizon. Many are already speculating that the Fed will give a signal that another rate hike could be forthcoming in December, when the final meeting for this calendar year is held.

There have also been calls to hike the funds rate to about 3.5% within the next year from 2.5% expected by the end of the year. Whether consumers are happy to dance to the tune of such reports is another thing.

However, since the Fed started hiking rates in 2015, the general consumer sentiment has been optimistic about the future and the outlook of the economy. House prices have gone higher, spending has increased, and consumer credit has also broken to new levels.

But some of this optimism appears to be waning as cracks begin to appear in what some believe to be a fragile growth, especially given the status the economies of other crucial trade partners of the U.S. Can this make some consumers to be a lot more cautions going into the festive season? And how could this affect the fourth quarter of the companies’ financial results?

Impact on the Stock Market Volatility

This could have a huge bearing on the performance of the stock market going into 2018 as uncertainty continues grow as demonstrated on the CBOE Volatility Index chart below.

Last week, the VIX hit a new multi-month high of 29 basis points. And while that spike has since subsided and dropped to a more familiar territory of about 20 basis points, the current signals still indicate that a retest of the mid-20s level could be on the cards in the coming weeks, if not days.

Chart via Stockcharts.com

The VIX remains way above the key moving average levels, the 50-day MA currently at about 14.43 and the 200-day MA at 15.47. While the MACD indicator also appears to have tipped the bars to the top side with clear indication that the momentum could be maintained at least for the next few days if not weeks.

Does This Make Trading Volatility an Attractive Option?

While shorting or buying long in the stock market could be a tricky customer to investors during high volatility periods, this does not make investing impossible. In trading, we say that volatility is a friend and the recent upsurge in the VIX could imply that perhaps it is time to trade the market.

However, trading can be as equally difficult given the dynamic nature of the market. Predicting where the prices will land in the next few weeks, days or even hours could be tasking, which is why traders have adopted modern trading techniques that involve the use of algorithmic trading tools and software to improve accuracy in predictions.

Some traders have gone a step further and capitalized on the power of machine learning and artificial intelligence, which have yielded magnificent results. However, while some of these tools are tried and proven, it is always good to run them through a trade simulator to test their performance over a reasonable time before using them on real investments.

Volatility is only as good to the trader as his ability to leverage the use of various technical tools to analyze and predict the potential direction of the market in short periods.

Some brokers and institutional investors have employed some of the most powerful tools and technologies to capitalize on high-frequency trading where super short-term trade positions are executed within minutes or hours. Retail traders too are getting in on the act.

The week before last week witnessed a major decline in the stock market. There was a significant recovery early last week, but the market subsided again towards the end. And now, it seems, this week comes bearing gifts for traders as a spike in volatility beckons.

Conclusion

In summary, the market has experienced a spike in volatility this month, which also happens to coincide with the start of the final earnings season of this calendar year. The federal reserve is expected to hike rates again in September despite a gathering cloud of skepticism regarding the strength of the U.S. economy.

Some are already beginning to worry about a potential housing market plunge as mortgage rates continue to climb in tandem with the rising funds rate. The non-farm payrolls, while they generally continue to support the Federal reserves views on economy, some cracks are beginning to appear as wage growth slows.

The festive season will be arriving soon and now the question will be whether consumers will respond in kind and spend, or they will approach the season with a degree of caution. This creates an endless list of potential uncertainties, which could help the VIX to spike even higher. Buying or shorting could be a little complicated now depending on the time frame, but trading will always welcome volatility.

DISCLOSURE: I have no positions in the stocks mentioned in this articles and do not plan to initiate any positions within the next 72 hours.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Comments

Emerging Growth

Lexaria Bioscience Corp

Lexaria Bioscience Corp is a food sciences company. It has two distinct consumer product brands: ViPova and Lexaria Energy. It uses patent pending technology to infuse hemp oil ingredients within…