Sunday, August 14, 2011

Is volatility the "new normal"?

The VIX volatility index, considered a measure of market uncertainty, spiked to a level of 48 on Monday, driven by several of the factors mentioned above. By Friday, the VIX remained at a heightened level of 36. The last time the VIX reached 48 was during the “Flash Crash” on May 6, 2010.

MY TAKE: Some traders and investors thrive in "fast paced" markets when volatility rises above 20, but this environment can be challenging for longer term investors. While "buying on the dips” may work for some investors, this seems like a time to 1) remain cautious in the short-term, 2) research new investment ideas and 3) wait for a bit more market stability.
NOTE: In recent months, high frequency trading accounted for slightly over 50% of daily trading in the U.S. equity markets. Estimates suggest this level increased to 80% during August. These sub-second trading systems, which leverage high performance algorithms, computational servers and optimized communication services, often benefit from high volatility. Their increased presence many be magnifying it as well.

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