It has been quite a week of news, innuendo and influence over markets – with Ben Bernanke, Washington DC, Italy and others all involved in the events.
We went from near all time highs in the indices to ‘get ready for a crash’ back to near all time highs. As one would expect volatility is lifted when the uncertainty is high and a perceived deadline approaches. Last week was the ‘appetizer’ with the VIX rising sharply, but hardly noticeable in the mid teens. However, Monday the fear was evident with monstrous 35% rise, but by the end of the day Wednesday it was back down under 15 having lost nearly all of the gain. Is this any way to trade?
What has been causing this rise in fear and subsequent selling? As we know, there are a million reasons to sell but only one reason to buy. So, need an excuse? Take your pick from any of them. But as we see how quick sentiment changes (see Figure 1 below) with seemingly every word, take heart that markets will stay volatile until some stability is seen. Remember January? A month of declining volatility after the ‘fiscal cliff’ crisis was kicked down the road. This current sequestration issue? Probably a similar situation where the crowd panics leaves the party then comes back to higher prices.
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