Sunday, August 30, 2015

Volatility and the Debate about Market Direction

  • Last week, asset prices around the world had broad swings, with strong declines in equities and commodities on Monday, followed by positive moves later in the week.
  • The S&P 500 Volatility Index (VIX) rose to 53.29 on Monday – its highest level since the 2008-2009 financial crisis.  By Friday, the VIX dropped to 26.  Note: The VIX is a measure of uncertainty and higher values suggest broad positive and negative price swings.
  • Market commentary included - Esther George, President of Kansas City Federal Reserve President, during a Bloomberg interview: “We should expect volatility, I think, from time to time, we are in a period of some uncertainty – [there are] questions about China, questions about global growth …  What it means for monetary policy I think is not yet clear. It’s a complication, it’s something we watch.”
  • Graham Secker and Matthew Garman of Morgan Stanley’s Research strategy team: “We do not believe that the ongoing economic weakness in EM and China will significantly drag down the European economy. Consequently, we feel that the current volatility in equity markets is likely to be temporary rather than the start of a long and painful bear market.” 
  • Andrew Lapthorne, Head of Quantitative Equity Research at Societe Generale: “Quality is now essentially price momentum and vice versa, and history tells us when these two strategies collide the omens are not usually good, as it is a phenomena usually associated with equity markets turning bearish.”
MY TAKE
  • With only 147 stocks in the S&P 500 trading about their 200 day moving average, investors are likely “crowding” into stocks with positive price momentum such as GoogleFacebookAmazonJP Morgan, VisaMasterCardStarbuckPriceline and Netflix – a process that may support Andrew Lapthorne’s view.
  • In addition, while the prices of many commodities (and related stocks) had a strong positive reversal last weekstability in these assets is likely needed to avoid additional market volatility.
  • Finally, many factors drive market direction but the increased use of automated systems by both high frequency traders and longer term institutional investors is likely increasing the speed of overall market action.

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