CapitalistMarks

Stock market volatility is increasing. Huh?

Posted on 02. Nov, 2009 by scott in economic daydreaming, markets

Lately the volatility of  markets is increasing.  This includes the equities markets as well as the primary energy markets (oil and gas).  Sadly we have become so used to hearing about this that is just goes in one ear and out the other.

I think we need to make sense of of this most recent trend in volatility and I will try to help you with this.

First of all what does volatility mean?  The easiest answer is that it refers to the wild (big) swings, both up and down, of the markets on a daily basis.  As an example, it is clear that in the last few days the DOW has been quite volatile.  Last Thursday the DOW was down well over 100  points in a pretty smooth chart that headed down from the opening bell but with sharp upturns followed by new lows all day.  Then on Friday the DOW headed up from the opening bell and kept on going until it closed up more than 200 points (2%+) from the prior days close.  Today the market was up more than 140 points in the first hour or so before heading steadily down until it was negative with two hours of trading left.  On not much news, the chart headed higher until it closed up more than 70 points.

These are the kind of markets that day-traders love.  If they are geniuses (and there really aren’t many of those relatively speaking) they can make multiple trades every day and come out ahead. But this volatility frightens the average individual investor.

So, for most of us there is a bigger story to tell from this volatility.  CNBC has found this topic so interesting that they now show the volatility on the real-time tickers that scrolls across their often confusing screens all day.  For stocks it is called the VIX (volatility index).  I have been watching and paying attention to CNBC for years and the first time I noticed the VIX identified on the screen was last fall when I was showing the channel to an economics class I was teaching. By the way, now it shows up every day.

Since it is with us so much now, it got me thinking . . . does volatility have any relevance to predicting market direction or anything else?

Here is my conclusion:

When the VIX (volatility of major indices — whether up or down) is high . . . meaning lots of volatility such as we have seen in the last few days it means that investors just can’t make up their minds.  In other words, taken as a whole, the sum of all investors inclination to buy or sell has no general trend and the slightest change in markets can cause a huge shift as nervous investors jump on the real-time ‘band-wagon’ causing the markets to experience sharp  movements (up or down).  This continues until some ‘news’ or similar things starts things going in the other direction. Then it starts over again . . . with no real trend.

All this seems pretty intuitive so far, doesn’t it.  Of course.  However, here is what you need to take away from the high volatility recently:

The prevailing trend (up around 60% since the March lows) has lost its convincing optimism (at least for the time being) and no one knows if it can or should continue.

Recognizing that the markets are forward looking indicators of 6-12 months (depending on who you believe — and I think 6 months is about right) the market volatility is warning of some negativity  in the broader economy starting next spring (more or less).

If you ‘play’ the markets you can take what you want out of this important revelation, but if you are living on Main Street it means that you should tighten the belt and hang on until things stabilize.

As always the key indicator is unemployment and the October employment statistics will be disclosed this Friday.  I would not bet on them being very good.  We should expect 10% unemployment for the first time in decades.  If this proves to be the case, volatility will probably stabilize and markets could respond with a decline that will  justify your belt tightening and, hopefully,  wake up President Obama and his democratic crew to the real crisis: 25,000,000 Americans without jobs or with part-time or inadequate jobs.

FRIDAY!

Can’t wait.

thanks to flickr’s woodleywonderworks for the photo

Tags: forward looking markets, market trends, mmsrket volatility, unemployment