The old adage “traders love volatility” may work for many short-term traders, but for those choosing the swing approach, all of that volatility brings stomach-churning aches and pains. We have seen some amazing moves in markets since the start of this year, and it appears there is no end in sight. In fact, we have seen triple-digit moves for the Dow Industrials everyday this year. Volatility, indeed!
A trending market is a trader’s best friend unless your time frame is a day or less. Extreme moves up and down cause consternation, worry, and doubt in our minds, especially in the late stages of a bull run.
The VIX portrays future volatility (30 days out) and expectations for market moves. As it rises, the fear and uncertainty prevail and sellers hit the eject button. But what has happened lately and over the last few months/years is volatility spikes have been sold aggressively. We recently had one of those spike peaks in the VIX confirmed with a lower low. When volatility drops, the ball is in the bulls’ court.
However, these moves are not healthy for the market. Perhaps there is opportunity, but at the end of the day it is all about confidence, and if participants are constantly pushed around by extreme moves (just the other day with a 20 handle move up then 33 hand move down in about two hours time), then they may leave the for awhile.
The Fed has left a fertile ground for investing in risk assets, and while there is no QE to juice the markets, there is still a very accommodative monetary policy at work (extremely low interest rates).
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